Kirk Inc. has come out with a new and improved product, and is expected to have an ROE of 14.4%. It will maintain a plowback ratio of 30%. Investors expect a 6.3% rate of return on the stock.
(a) At what P/E ratio would you expect Kirk to sell?
(b) Kirk is expected to report an EPS of $5 for next year. Assuming Kirk's current value is measured with the constant growth DDM, compute the present value of growth opportunities for Kirk.
(c) If the present value of growth opportunities = 0, find the ROE for Kirk and explain why. Assume all else remain constant. (HINT: It is an intuitive question. While you need to give a number for an answer, you DO NOT need any calculation.)