Metatrend’s stock will generate earnings of $6 per share this year. The discount
ID: 2758998 • Letter: M
Question
Metatrend’s stock will generate earnings of $6 per share this year. The discount rate for the stock is 10%, and the rate of return on reinvested earnings also is 10%.
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) 20%; (iii) 40%. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter the growth rates as a whole percent.)
Redo part (a) now assuming that the rate of return on reinvested earnings is 15%. 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 answers to 2 decimal places.)
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) 20%; (iii) 40%. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter the growth rates as a whole percent.)
Redo part (a) now assuming that the rate of return on reinvested earnings is 15%. 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 answers to 2 decimal places.)
Reinvestment of Earnings 20% 0% 40% Growth rate of dividends 0% Stock priceExplanation / Answer
A) Retention Ratio (a) 0 0.2 0.4 Return on reinvested earnings (b) 0.1 0.1 0.1 Growth rate (a*b ) 0 0.02 0.04 Growth rate (in %age) 2% 4% B) Dividend per share (D1) 6 4.8 3.6 Discount Rate,K 10% 10% 10% Growth rate, g 2% 4% K-g 10% 8% 6% Stock Price (D1/K-g) 60 60 60 C) Return on reinvested earnings (a) 15% 15% 15% Required rate of return (b) 10% 10% 10% PVGO (a-b) 5% 5% 5%