Question
Metatrends stock will generate earnings of $2 per share this year. The discount rate for the stock is 10%, and the rate of return on
Metatrends stock will generate earnings of $2 per share this year. The discount rate for the stock is 10%, and the rate of return on reinvested earnings also is 10%.
a. Find both the growth rate of dividends and the price of the stock if the company reinvests the following fraction of its earnings in the firm: (i) 0%; (ii) 40%; (iii) 60%. (Do not round intermediate calculations. Enter the growth rates as a whole percent.)
b. Redo part (a) now assuming that the rate of return on reinvested earnings is 15%. What is the present value of growth opportunities (PVGO) for each reinvestment rate? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
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