Present value of growth opportunities for reinvestment rate

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Twittre's stock will generate earnings of $12 per share this year. The discount rate for the stock is 12%, and the rate of return on reinvested earnings (ROE) also is 12%.

A. 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) 25%; (iii) 50%.

B. Redo part (a) now assuming that the rate of return on reinvested earnings (ROE) is 20%. What is the present value of growth opportunities for each reinvestment rate?

C. Considering your answers to parts (a) and (b), can you briefly state the difference between companies experiencing growth and companies with growth opportunities?

Reference no: EM132689277

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