Asked by Christina Silverio on May 05, 2024
Verified
Next year's earnings are estimated to be $6. The company plans to reinvest 33% of its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities?
A) $6
B) $24.50
C) $44.44
D) $75
Cost of Equity
The return that investors require for investing in a company's equity, often estimated using models such as the Capital Asset Pricing Model (CAPM).
Present Value
The current value of a future amount of money or stream of cash flows given a specified rate of return.
Growth Opportunities
The potential for business expansion, revenue increase, or higher profits due to internal strategies or external conditions in the market.
- Acquire insight into the notion of Present Value of Growth Opportunities (PVGO) and how it affects the company's worth.
- Analyze the effects of profit increase, rates of reinvestment, and requisite yields on share value and valuation metrics.
Verified Answer
TM
Tymarah MtenderaMay 08, 2024
Final Answer :
B
Explanation :
g = 0.33 × 0.12 = 0.0396
Value with growth = ($6 × 0.67)/(0.08 − 0.0396) = $99.50
Value without growth = $6/0.08 = $75
PVGO = $99.50 − 75 = $24.50
Value with growth = ($6 × 0.67)/(0.08 − 0.0396) = $99.50
Value without growth = $6/0.08 = $75
PVGO = $99.50 − 75 = $24.50
Learning Objectives
- Acquire insight into the notion of Present Value of Growth Opportunities (PVGO) and how it affects the company's worth.
- Analyze the effects of profit increase, rates of reinvestment, and requisite yields on share value and valuation metrics.