P/E Ratios. Web Cites Research projects a rate of return of 20 percent on new projects.

Management plans to plow back 30 percent of all earnings into the firm. Earnings this year will be $2 per share, and investors expect a 12 percent rate of return on the stock.

a. What is the sustainable growth rate?

b. What is the stock price?

c. What is the present value of growth opportunities?

d. What is the P/E ratio?

e. What would the price and P/E ratio be if the firm paid out all earnings as dividends?

f. What do you conclude about the relationship between growth opportunities and P/E ratios?