Question
Asked Nov 13, 2019
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Adobe Systems has come out with a new and improved product.  As a result, the firm projects an ROE of 22.5%, and it will maintain a plowback ratio of .50.  Its projected earnings are $3.75 per share. Investors expect an 18% rate of return on the stock.

What would the P/E ratio and the present value of growth opportunities if the firm planned to reinvest only 40% of its earnings?

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Expert Answer

Step 1

Calculation of P/E Ratio and Present Value of Growth Opportunities (PVGO):

The P/E Ratio is 6.67 and present value of growth opportunities is $4.17.

Excel Spreadshee...

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B 1 Earnings per share $3.75 2 ROE 22.50% 3 Expected Return 4 Reinvested Earnings 18% 40% 5 P/E Ratio 6.67 6 PVGO $4.17

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