The income statement of firm ABC at the end of year 2011 is given below :

Sales $5.50 million

Cost of goods sold 2.85

Depreciation 0.28

Selling and administrative expenses 1.50

EBIT 0.87

Interest expense 0.13

Taxable income 0.74

Taxes 0.33

Net income 0.41

Total liability of firm ABC is $3 million and total asset turnover ratio is 1.1. Furthermore, there are 1 million shares outstanding for firm ABC, the beta of stock is 1.2, expected market risk premium is 5% and T-bills rate is 4%.

a) The firm decides to retain 40% of the net income for future reinvestment and distribute the rest as dividends. What is the dividend growth rate? b) What is the intrinsic value of the stock if the dividend growth rate calculated in part (a) will always continue? c) If the dividend growth rate calculated in part (a) only continues for two years, then the firm changes its retention ratio so that the dividend growth rate will remain at 4% thereafter. What is the intrinsic value of the stock now? d) Based on the stock price calculated in part (c), and if the retention ratio in next year is still 40%. What is the Present Value of Growth Opportunities (PVGO)? Would the firm be a takeover target for another firm?