What is the net present value of the growth opportunities

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Reference no: EM132178179

Question - The Micro Management Corporation (MMC) currently operates as a cash cow, i.e., it pays out all its earnings as dividends. Based on your expectation that MMC has good investment opportunities, allowing the firm to earn a 12% return on retained earnings (ROIC) every year, you suggest the firm should reduce its dividend pay-out ratio to a new level of 60% starting at t=1. Current earnings (t=0) are $240,000 and the corporation has 40,000 shares outstanding.

A: If the required rate of return on the stock is 10%, what is the net present value of the growth opportunities for MMC?

B: What return on the stock do you expect if management were to announce a revised forecast for ROIC that involves a drop to 11% starting in year 5.

Reference no: EM132178179

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