We are going to explore the difference between two different companies, both from the same sector, firms

A and B$.$ They differ in their reinvestment abilities. Firm A and Firm B are both financed with equity only.

At the end of their business year, both firms report $$1,000$m in revenue. The net income is $$200$m for both

firms. Assume that management is able to maintain a constant net profit margin of $20\%.$

$$ Firm A is capable of achieving $8\%$ revenue growth annually by investing $30\%$ of their net income.

$$ Firm B is capable of achieving $8\%$ revenue growth annually by investing $40\%$ of their net income.

Assume that this difference persists into the future.

a$)$ Find the value of firms A and B$.$ Use a discount rate of $18\%$ for both firms.

Note: This value is the sum of the value of assets already in place plus the PV of future growth opportunities.

b$)$ The forward P$/$E ratio of a company is the price of a share divided by next year$$s earnings per share,

or its value divided by next year$$s earnings. What is the forward P$/$E ratio of firms A and B$?$

c$)$ Comment on your result. Why is the forward P$/$E ratio higher for firm A$?$ Or said differently: Why

would shares of firm A be more expensive?