Question 2 Equity Valuation (10 marks) A New Zealand-based company is involved in the development of a new device. The company has a ROE of 25% and maintains a plowback ratio of 0.40. Its forecasted earnings one year from now are $1 per share. Investors expect a 20% rate of return on its stock. (a) Calculate the price at which this company's stock should sell according to the constant growth dividend discount model (DDM). (2 marks) growth rate =ROE retention rate =25%0.4=0.1 P0=D1/(kg)P0=1(20%0.1)P0=$10 (b) Calculate the present value of growth opportunities (PVGO) for the company stock. Explain the meaning of this value. (2 marks) PVGO=P0E1/K Page 3 of 7 FINA602 S2 2022 Student ID Number: Student Name: =10$1/20%=$45 (c) If the company planned to reinvest only 20% of its earnings, explain whether and why reducing the reinvestment rate is a good decision for the company. (d) Whathis the P/E ratio for the company stock? (2 mark) Suppose that new information from the company leads to revising the estimates regarding the company's prospect in such a way that the company's dividend will be $0.20 per share for the first year from now and $0.30 per share for the second and third year from now. After three years, the company's dividend will grow at a constant rate of 5% per annum permanently. (e) What is the price at which this company's stock should sell based on the revised estimates according to two-stage DDM