Question

xyz corp expects to earn $4.3 per share next year and plow back 41.86% of its earnings (i.e., it expects to pay out a dividend of $2.5 per share, representing 58.14% of its earnings). the dividends are expected to grow at a constant sustainable growth rate and the stocks are currently priced at $30 per share. how much of the stock's $30 price is reflected in present value of growth opportunities (pvgo) if the investors' required rate of return is 20%? $

Answer 1

Approximately $8.32 of the stock's $30 price is reflected in the Present Value of Growth Opportunities (PVGO).

Step-by-step explanation:

To calculate the Present Value of Growth Opportunities (PVGO), we need to determine the intrinsic value of the stock based on its dividends and the required rate of return.

First, let's calculate the dividend growth rate (g) using the plowback ratio:

g = plowback ratio * return on equity

g = 0.4186 * ($4.3 / $30)

g ≈ 0.0598 or 5.98%

Next, let's calculate the expected dividend per share next year:

Expected dividend per share = Earnings per share * Dividend payout ratio

Expected dividend per share = $4.3 * 0.5814

Expected dividend per share ≈ $2.5

Now, let's calculate the intrinsic value of the stock using the Gordon Growth Model:

Intrinsic value = Dividend per share / (Required rate of return - Growth rate)

Intrinsic value = $2.5 / (0.20 - 0.0598)

Intrinsic value ≈ $21.68

Finally, we can calculate the PVGO:

PVGO = Stock price - Intrinsic value

PVGO = $30 - $21.68

PVGO ≈ $8.32

Therefore, approximately $8.32 of the stock's $30 price is reflected in the Present Value of Growth Opportunities (PVGO).