What is the sustainable growth rate

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Question - Phoenix Industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it announced a $1 per share dividend to be paid a year from now, the first dividend since the crisis. Analysts expect dividends to increase by $1 a year for another 2 years. After the third year (in which dividends are $3 per share) dividend growth is expected to settle down to a more moderate long-term growth rate of 8%. If the firm's investors expect to earn a return of 16% on this stock, what must be its price?

Web Cites Research projects a rate of return of 20% on new projects. Management plans to plow back 30% of all earnings into the firm. Earnings this year will be $6 per share, and investors expect a rate of return of 12% on stocks facing the same risks as Web Cites.

a. What is the sustainable growth rate?

b. What is the stock price?

c. What is the present value of growth opportunities (PVGO)?

d. What is the P/E ratio?

e. What would the price and P/E ratio be if the firm paid out all earnings as dividends?

Reference no: EM132982886

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