Web Cites Research projects a rate of return of 20% on new projects. Management plans to plow

Question:

Web Cites Research projects a rate of return of 20% on new projects. Management plans

to plow back 30% of all earnings 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?

Projected Rate of return..... 20.00%

Plow back ratio....... 30.00%

Earnings per share..... .... $3.00

Rate of return on stocks..... 12.00%

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing...