Question
Firm ABC projects an ROE of 10%, and it will maintain a plowback ratio of 50%. Its earnings at the end of this year (EPS1)
Firm ABC projects an ROE of 10%, and it will maintain a plowback ratio of 50%. Its earnings at the end of this year (EPS1) will be $3 per share. Investors expect an 8% rate of return on the stock.
a. At what price would you expect the firm to sell?
b. What is the present value of growth opportunities?
c. What would be the price and the present value of growth opportunities if the firmplanned to reinvest only 40% of its earnings?
d. Firm ABC is all-equity-financed and has no debt. Suppose the tax rate is 40%.What is the operating return on assets (ROA)?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started