Web Cites Research projects a rate of return of 20 percent on new projects. Management plans to plow back 30 percent of all earnings into the firm. Earnings this year will be $2 per share, and investors expect a 12 percent rate of return on the stock.

a) What is the sustainable growth rate?

b) What is the stock price?

c) What is the P/E ratio?

d) What would the price and P/E ratio be if the firm paid out all earnings as dividends?

e) What do you conclude about the relationship between growth opportunities and P/E ratios?

f) What is the present value of growth opportunities?