In an earnings announcement, XYZ corporation estimates it will pay $5 dividends next year, which represents 100% of its earnings. The required return of its investors is 12%. If the company decides to plowback 60% of the earnings at the firm's current return on equity of 15%.

1.What is XYZ corporation's present value of growth opportunity (PVGO)?

2.Calculate the PVGO for XYZ if the plowback ratio is 20% and 40%, respectively.

3.Given the results in 2), conclude the relationship between plowback ratio and the valuation of stock, and the relationship between plowback ratio and PVGO.

4.Rework you 1) and 2) with a new ROE of 10%, and conclude how ROE affect PVGO.