Problem 1. Sisters Corp expects to earn $7 per share next year. The firm’s ROE is 19% and its plowback ratio is 50%. If the firm's market capitalization rate is 10%, what is the present value of its growth opportunities?
Problem 2. Even Better Products has come out with a new and improved product. As a result, the firm projects an ROE of 24%, and it will maintain a plowback ratio of .28. Its earnings this year will be $3 per share. Investors expect a 15% rate of return on the stock.
(a) At what price and P/E ratio would you expect the firm to sell? (Round your answers to 2 decimal places)
(b) What is the present value of growth opportunities? (Round your answer to 2 decimal places)
(c) What would be the P/E ratio and the present value of growth opportunities if the firm planned to reinvest only 17% of its earnings? (Round your answers to 2 decimal places)
Problem 3. MF Corp. has an ROE of 12% and a plowback ratio of 45%. The market capitalization rate is 18%.
(a) If the coming year's earnings are expected to be $3 per share, at what price will the stock sell? (Round your answer to 2 decimal places.
(b) What price do you expect MF shares to sell for in three years? (Round your answer to 2 decimal places. )