Web Cites Research projects a rate of return of 20% on new projects. Management plans to plow back 30% of all earning into the firm. Earnings this year will be $3 per share, and investors expect a 12% rate of return on stocks facing the same risks as Web Cites.

a. What is the sustainable growth rate?

b. What is the stock price?

c. What is the present value of growth opportunities?

d. What is the P/E ratio?

e. What would the price and P/E ratio be if the firm paid out all earnings as

dividends?

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