HIJ Company has made 10 million dollars profit last year. The company has decided annually to give out 30% (1-b) of the profit as dividends (D1) to its shareholders, and the remaining 70% (b) of the profit will be kept in the company for other investments. The historical ROE ratio of the company is 10%, and the ROE ratio is estimated to remain the same in the future. The current stock price (P0) is 30 with shares outstanding of 2 million.

(a) What is the growth rate (g) of the Company?

(b) Calculate the dividend for each share (D1).

(c) Calculate required return (r) of the DFG Company stock. (d) If the discount rate is 5%, what is the Present Value of Growth Opportunities (PVGO)?

Please refer to the company/stock information in Q.3. If P0, D1 and b remain unchanged at $30, $1.5 and 70% respectively, what happens to the new values of r, ROE and g of the stock if PVGO is now 0 (zero)? (Hint: Use the relations in (a) and (c) of Q.3 to compute the new values of r, ROE and g)

(a) What is the new required return (r) of the stock?

(b) What is the new ROE of the stock?

(c) What is the new g of the stock?

(d) Use the PVGO formula to demonstrate that the PVGO is zero under these new values.