Task: 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 earning also is 5%.
Question 1: 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%
Question 2: 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?
Question 3: Considering your answers to parts (a) and (b). can you briefly state the difference between companies experiencing growth versus companies with growth opportunities.