For some reaosn I cannot get the last numbers for 20% and 40% Metatrend\'s stock
ID: 2759794 • Letter: F
Question
For some reaosn I cannot get the last numbers for 20% and 40%
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.)Explanation / Answer
20% reinvestment
Do = 6 x0.80 =4.80
G= b x r= 0.20 x 0.15 =3%
PVGO = Do x (1+g)/(Ke-g) -EPS/KE
= 4.80 x(1+0.03)/(0.10-0.03) – 6/0.10
= 70.63 -60
= 10.63
40% reinvestment
Do = 6 x0.60 =3.6
G= b x r= 0.40 x 0.15 =6%
PVGO = Do x (1+g)/(Ke-g) -EPS/KE
= 3.60 x(1+0.06)/(0.10-0.06) – 6/0.10
= 95.40 -60
= 35.40