Final answer:
The Present Value of Growth Opportunities (PVGO) for Tri-Coat Paints is calculated by subtracting the value of the company without growth from the current market price. The PVGO, based on the given earnings per share and required return, is $0.88 per share.
Step-by-step explanation:
The student's question concerns the calculation of the Present Value of Growth Opportunities (PVGO) for Tri-Coat Paints, using the given market value per share, earnings per share, and the required return rate. To calculate PVGO, we must start by finding the value of the company without growth, which can be done using the formula for a perpetuity: Value of company without growth = Earnings per share / Required return. The next step is to subtract this value from the current market price to find the PVGO.
Firstly, we calculate the no-growth value per share: $2.89 / 0.08 = $36.125 per share. Secondly, we subtract this value from the current market value to find the PVGO: $37.00 - $36.125 = $0.875 per share. Therefore, the PVGO of Tri-Coat Paints is $0.88 (rounded to two decimal places).
It is important to note that the real-world application of this formula takes into account the fact that actual profits are estimated, and the choice of the required return rate can significantly affect the PVGO.