1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
KATRIN_1 [288]
3 years ago
12

Even Better Products has come out with a new and improved product. As a result, the firm projects an ROE of 20%, and it will mai

ntain a plowback ratio of 0.30. Its projected earnings are $2 per share. Investors expect a 14% rate of return on the stock.
a.
At what price and P/E ratio would you expect the firm to sell? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Price $
P/E ratio
b.
What is the present value of growth opportunities? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

PVGO $
c.
What would be the P/E ratio and the present value of growth opportunities if the firm planned to reinvest only 20% of its earnings? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

P/E ratio
PVGO $
Business
1 answer:
Arlecino [84]3 years ago
4 0

Answer and Explanation:

The computation is shown below:

a. The price and P/E ratio is

Price = Current year dividend ÷ (Required rate of return - growth rate)

where,

Growth rate is

= ROE × plowback ratio

= 20% × 0.30

= 6%

And, the current year dividend is ×

= $2 × (1 - 0.30)

= $1.4

So, the price is

= $1.4 ÷ (0.14 - 0.06)

= $17.50

Now the P/E ratio is

= $17.50  ÷ 2

= 8.75

b)  For the present value of growth opportunities, the formula and the computation is

= Price of the stock - earnings ÷ required rate of return

= $17.50 - $2 ÷ 0.14

= 3.21

c)  The P/E ratio and the present value of growth opportunities is

But before that we need to find out the price which is

Price = Current year dividend ÷ (Required rate of return - growth rate)

where,

Growth rate is

= ROE × plowback ratio

= 20% × 0.20

= 4%

And, the current year dividend is

= $2 × (1 - 0.20)

= $1.6

So, the price is

= $1.6 ÷ (0.14 - 0.04)

= $16

Now the P/E ratio is

= $16  ÷ 2

= 8

And, the growth opportunities is

= Price of the stock - earnings ÷ required rate of return

= $16 - $2 ÷ 0.14

= 1.72

You might be interested in
The following adjusted trial balance contains the accounts and year-end balances of Cruz Company as of December 31.
vova2212 [387]

Answer:

CRUZ COMPANY

1. Closing Entries:

No. Account Title             Debit      Credit

901 Income Summary  $33,100

612 Depreciation expense

—Equipment                                  $3,000

622 Salaries expense                  22,000

637 Insurance expense                 2,500

640 Rent expense                         3,400

652 Supplies expense                  2,200

To close expenses to the Income Summary.

404 Services revenue $44,000

901 Income Summary                    $44,000

To close Service Revenue to the Income Summary.

318 Retained earnings $37,600

901 Income Summary (Retained Earnings) $37,600

To close the Retained Earnings of prior year to Retained Earnings section of the Income Summary.

901 Income Summary

    (Retained Earnings) $7,000

319 Dividends                                    $7,000

To close the Dividends to the Retained Earnings section of the Income Summary.

2. CRUZ COMPANY

Post-Closing Trial Balance

As of December 31

No. Account Title             Debit      Credit

101 Cash                        $ 19,000

126 Supplies                    13,000

128 Prepaid insurance     3,000

167 Equipment               24,000

168 Accumulated depreciation

—Equipment                                  $ 7,500

307 Common stock                        10,000

318 Retained earnings                    41,500

Totals                        $ 59,000   $ 59,000

Explanation:

a) Data and Calculations:

CRUZ COMPANY

Trial Balance

As of December 31

No. Account Title             Debit      Credit

101 Cash                        $ 19,000

126 Supplies                    13,000

128 Prepaid insurance     3,000

167 Equipment               24,000

168 Accumulated depreciation

—Equipment                                  $ 7,500

307 Common stock                        10,000

318 Retained earnings                   37,600

319 Dividends                  7,000

404 Services revenue                   44,000

612 Depreciation expense

—Equipment                    3,000

622 Salaries expense  22,000

637 Insurance expense 2,500

640 Rent expense         3,400

652 Supplies expense 2,200

Totals                        $ 99,100    $ 99,100

b) Income Summary for the year ended December 31:

Revenue                   $44,000

Expenses                   (33,100)

Net Income              $10,900

Retained Earnings    37,600

Dividends                  (7,000)

Retained Earnings $41,500

5 0
3 years ago
Closely held corporations sell shares of stock to the public. <br> True <br> False
aev [14]
The answer to the question is false
4 0
3 years ago
Read 2 more answers
Denver Systems has total assets of $1,000,000; common equity of $400,000; a gross profit of $800,000; total operating expenses o
krok68 [10]

Answer:

See

Explanation:

4 0
3 years ago
Salespeople who love their products, and possess vast product knowledge, sometimes overload their customers with product data th
Svetach [21]

Answer:

Option D Data Dump

Explanation:

The provision of the unneccesary data alongwith the other necessary data to the user is reffered to as Data dumping. Data dumping by the salesperson might affect the opinion because the customer might change his mind to buy a specific product or postpond purchasing the product.

5 0
3 years ago
Forrester Company is considering buying new equipment that would increase monthly fixed costs from $276,000 to $544,500 and woul
REY [17]

Answer:

The correct answer is E.

Explanation:

Giving the following information:

Forrester Company is considering buying new equipment that would increase monthly fixed costs from $276,000 to $544,500 and would decrease the current variable costs of $60 by $15 per unit. The selling price of $100 is not expected to change.

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 544,500/ [(100-45)/100]

Break-even point (dollars)= $990,000

6 0
3 years ago
Read 2 more answers
Other questions:
  • Sleep Tight, Inc., manufactures bedding sets. The budgeted production is for 45,800 comforters this year. Each comforter require
    7·1 answer
  • Managers who must be familiar with the equal employment opportunity commission regulations are __________ managers.
    11·1 answer
  • If the demand increases by 100%, annual production will have to increase to jaw-breakers next year to meet the expected increase
    13·1 answer
  • Bryan Houlberg expects his C corporation to generate a profit of $200,000. What is Bryan's after-tax cash flow from the corporat
    6·1 answer
  • Calculate the amount of depreciation to report during the year ended December 31, 2013, for equipment that was purchased at a co
    12·1 answer
  • On January 1, 2018, Savor Corporation leased equipment to Spree Company. The lease term is 9 years. The first payment of $698,00
    14·1 answer
  • If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary the: 

    13·1 answer
  • A company factored $40,000 of its accounts receivable and was charged a 3% factoring fee. The journal entry to record this trans
    5·1 answer
  • When the Federal government takes action to change taxes and spending to stimulate the economy such policy is:_________
    13·1 answer
  • 1.1  Basic terminologies in agricultural accounting 1.2   Recognition and measurement of agricultural produces 1.3   Reporting a
    9·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!