Question: ROE (return on equity) is 10% Capitalisation rate (required rate of return or k) is 8% Earnings of $10 per share Company reinvests 40% of

ROE (return on equity) is 10%

Capitalisation rate (required rate of return or k) is 8%

Earnings of $10 per share

Company reinvests 40% of its earnings (i.e., plowback rate or b = 0.4)

Expected year-end dividend is $6 per share

Draw a timeline to identify the amount and timing of cash flows obtained with the stock. Next, calculate the stock value and the Present Value of Growth Opportunities (PVGO) of the stock.

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