
a.
To determine: The sustainable growth rate.
a.

Answer to Problem 38QP
The sustainable growth rateis 6%.
Explanation of Solution
Determine the sustainable growth rate
Therefore, the sustainable growth rateis 6%.
b.
To determine: The stock price.
b.

Answer to Problem 38QP
The stock priceis $35.
Explanation of Solution
Determine the stock price
Therefore, the stock priceis $35.
c.
To determine: The
c.

Answer to Problem 38QP
The present value of growth opportunities is $10.
Explanation of Solution
Determine the present value of growth opportunities
Therefore, the present value of growth opportunities is $10.
d.
To determine: The P/E ratio.
d.

Answer to Problem 38QP
The P/E ratiois 11.67.
Explanation of Solution
Determine the P/E ratio
Therefore, the P/E ratio is 11.67.
e.
To determine: The price and P/E ratio if firm paid all earnings as dividends.
e.

Answer to Problem 38QP
The price is $25 and P/E ratiois 8.33 if firm paid all earnings as dividends.
Explanation of Solution
Determine the price and P/E ratio
The price of if firm paid all earnings as dividends is $25, which is nothing but the stock price using no growth model.
Therefore, the price is $25 and P/E ratio is 8.33 if firm paid all earnings as dividends.
e.
To discuss: The relationship between growth opportunities and PE ratio.
e.

Explanation of Solution
The relationship between growth opportunities and PE ratio is as follows:
If the PE ratio is high, it directly reflects on higher present value of growth opportunities.
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Chapter 7 Solutions
FUNDAMENTALS OF CORP.FIN.(LL)-W/CONNECT
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