Problem 7:

The current risk-free rate is 3 percent and the market risk premium is 5 percent. You are trying to value ABC company and it has an equity beta of .9.The company earned $2.50 in the year that just ended.You expect the company's earnings to grow 4 percent per year.The company has an ROE of 12 percent.

a. what is the value of the stock?

b. What is the present value of the growth opportunity?

How do you calculate the value of a stock & present value or growth opportunity?

Price-to-earnings ratio = stock price / earnings per share