Question: The market consensus is that ABC has an ROE = 15% and a beta of 1.2. It plans to maintain indefinitely its traditional plowback (retention) ratio of 40%. This year's earnings were $3 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 8%, and the risk-free rate is 3%.
(a) Find the price at which ABC stock should sell (intrinsic value V0).
(b) Calculate the (current) P/E ratio.
(c) Calculate the present value of growth opportunities (PVGO).
(d) Suppose your research convinces you ABC will announce momentarily that it will immediately increase its plowback (retention) ratio to 50%. Find the intrinsic value of the stock.