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XYZ Inc. has been reinvesting 60% of earnings into a project that yields a return of 12%. The dividend yield is expected to be 3%
XYZ Inc. has been reinvesting 60% of earnings into a project that yields a return of 12%. The dividend yield is expected to be 3% next year. The current share price of XYZ Inc. is $120 / share.
- (a)If XYZ Inc. can continue to reinvest at this rate and earn 12% on the investment, how rapidly will the earnings and dividends grow? Also, calculate the market required rate of return.
- (b)What is the present value of the growth opportunities (PVGO) of XYZ Plc.? Comment briefly on the PVGO you obtained.
- (c)Now XYZ Plc. announces that it will reinvest 80% of its earnings for the next 5 years. Starting in Year 6, the company will again be able to pay out 40% of its earnings. What will XYZ'sshare price be once this announcement is made?
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