Question
Asked Nov 6, 2019
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Company has expected earnings of $4.8 per share for next year. The firm's ROE is 16%, and its earnings retention ratio is 55%. If the firm's market capitalization rate is 12%, what is the present value of its growth opportunities?

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Expert Answer

Step 1

Present value of growth opportunities (PVGO) can be calculated as below:

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PVGO = value of stock -value of no growth

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Step 2

Value of no growth can be calculated as earnings of $4.8 divided by the market capitalization rate of 12%.

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Earnings Value of no growth- market cap rate $4.8 0.12 S40

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Step 3

Value of stock with growth can be calculated ...

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growth ROExretention ratio =16%x 55% 8.80% Earnings x (1-retention ratio) Value with growth= market cap rate -growth rate Dr market cap rate -growth rate $4.8 x(1-0.55) 0.12-0.088 $2.16 3.20% -S67.50

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