You expect Seton Venture to have a ROE of 18%, a beta of 1.25, an expected earnings per share (E1) of $4.73, and a stable retention ratio (b) of 70%. The expected market return for future years is 12%, and the 10-year Treasury note is yielding 1.8%.
a) Calculate the intrinsic value estimate of Seton Venture stock (V0) according to the constant growth DDM.
b) Calculate the Present Value of Growth Opportunities (PVGO).
c) Calculate the justifiable forward P/E and trailing P/E according to the constant growth DDM.
d) If the expected ROE for Seton Venture has been revised down to 14% from 18%, recalculate the V0, PVGO, and the justifiable forward P/E and trailing P/E. Discuss whether these changes in V0, PVGO, and the justifiable forward P/E and trailing P/E are consistent with the concepts that we learned from class.