Our firm has a beta of 0.75 and just distributed all its earnings as dividends ($10 per share). The expected market return is 12% and the risk-free rate comfortably sits at 4%.

1.Price the stock, if the dividend remains constant forever.

2.Calculate the P/E ratio of the firm.

3.Price the stock if the company can retain 20% of its earnings in the future to invest in projects with ROE=20%. Will the stock price increase or decrease and why?

4.If the company retains its earnings as in (3), find the present value of its growth opportunities and its P/E ratio.

5.If the company retains 20% of its earnings but can achieve only ROE = 5%, estimate the price, the present value of its growth opportunities and its P/E ratio.