Constant-Growth Model. Metatrends stock will generate earnings of $5 per share this year. The discount rate for
Question:
Constant-Growth Model. Metatrend’s stock will generate earnings of $5 per share this year. The discount rate for the stock is 15 percent and the rate of return on reinvested earnings also is 15 percent.
a. 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 percent; (ii) 40 percent; (iii) 60 percent.
b. Redo part
(a) now assuming that the rate of return on reinvested earnings is 20 percent.
What is the present value of growth opportunities for each reinvestment rate?
c. Considering your answers to parts
(a) and (b), can you briefly state the difference between companies experiencing growth versus companies with growth opportunities?
Step by Step Answer:
Study Guide To Accompany Fundamentals Of Corporate Finance
ISBN: 9780073012421
5th Edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus