Metatrend's stock will generate earnings of $6 per share this year. The discount rate for the stock is 15%, and the rate of return on reinvested earnings also is 15%.
a. Find both the growth rate of dividends and the price of the stock if the company reinvests the following fraction of its earnings in the firm: (i) 0%; (ii) 40%; (iii) 60%
b. Redo part (a) now assuming that the rate of return on reinvested earnings is 20%. What is the present value of growth opportunities for each reinvestment rate?
Earnings.......... ....$6.00
Discount rate.............15.00%
Rate of return on reinvested earnings...15.00%
Reinvestment: (a)
(i) ................0.00%
(ii) ................40.00%
(iii) ................60.00%
Rate of return on reinvestment (b) ..... 20.00%