Metatrend’s stock will generate earnings of $3 per share this year. The discount
ID: 2756462 • Letter: M
Question
Metatrend’s stock will generate earnings of $3 per share this year. The discount rate for the stock is 15%, and the rate of return on reinvested earnings also is 15%.
Find both the growth rate of dividends and the price of the stock if the company reinvests the following fraction of its earnings in the firm: (i) 0%; (ii) 40%; (iii) 60%. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations.)
Reinvestment of Earnings
Redo part (a) now assuming that the rate of return on reinvested earnings is 20%. What is the present value of growth opportunities (PVGO) for each reinvestment rate? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answer to 2 decimal places.)
Reinvestment of Earnings
Metatrend’s stock will generate earnings of $3 per share this year. The discount rate for the stock is 15%, and the rate of return on reinvested earnings also is 15%.
Explanation / Answer
a.
(i) Reinvest 0% of earnings:
Growth Rate = 0%
Dividend = $ 3.00
Stock price (P0) = $20.00
(ii) Reinvest 40% of earnings:
Growth Rate = 6.00%
Dividend= $ 1.80
Stock price (P0) = $20.00
(iii) Reinvest 60% of earnings:
Growth Rate = 9.00%
Dividend= $ 1.20
Stock price (P0) = $20.00
b.
(i) Reinvest 0% of earnings:
Stock price with 15% rate of return = $20.00
Stock price (P0) = $20.00
PVGO= $ 0
(ii) Reinvest 40% of earnings:
Stock price with 15% rate of return = $20.00
Stock price (P0) = $25.71
PVGO= $ 5.71
(iii) Reinvest 60% of earnings:
Stock price with 15% rate of return = $20.00
Stock price (P0) = $40.00
PVGO = $20.00