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Innovative Group Ltd, an IT company, is undertaking a new project to develop software for Fair Supermarkets. As such, it is expected that the company
Innovative Group Ltd, an IT company, is undertaking a new project to develop software for Fair Supermarkets. As such, it is expected that the company has an ROE of 24% and a plowback ratio of 0.30. The forecasted earnings of the company for the first year from now are $2 per share. Investors expect a 12% rate of return on the company's stock. (a) Calculate the price at which this company's stock should sell using the constant-growth dividend discount model. (b) Calculate the present value of growth opportunities for this company. (c) If this company plans to reinvest only 20% of its earnings, will dropping the reinvestment rate from 30% to 20% be a good decision for the company? Why
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