Question

The Crash, Inc. has an ROE of 12%, a payout ratio of 60%, earnings next year of $8 per share, a required return of 18%, and a current price of $36.36 Find the Present Value of Growth Opportunities for Crash.

Answer 1

The Present Value of Growth Opportunities (PVGO) for Crash, Inc. is $29.25 per share, calculated by subtracting the no-growth stock price from the current stock price, with the no-growth price derived from next year's earnings, payout ratio, and required return.

Step-by-step explanation:

To find the Present Value of Growth Opportunities (PVGO) for Crash, Inc., we must understand that PVGO represents the portion of the company's stock price that is attributable to future growth. The formula to calculate stock value in this case is:

Stock Price = EPS x (1 - Payout Ratio) ÷ (Required Return - Growth Rate) + PVGO

Crash, Inc. has provided the following information:

Earnings per share (EPS) for next year: $8

Payout ratio: 60%

Required return: 18%

Return on Equity (ROE): 12%

Current stock price: $36.36

First, we need to calculate the Growth Rate using the retention rate and ROE, which is given by:

Growth Rate = ROE x (1 - Payout Ratio)

Substituting the known values:

Growth Rate = 0.12 x (1 - 0.60) = 0.048 or 4.8%

The company's stock price without growth (No-Growth Price) can be found by:

No-Growth Price = EPS x (1 - Payout Ratio) ÷ Required Return

Substituting the known values:

No-Growth Price = $8 x (1 - 0.60) ÷ 0.18 = $7.11

Now we can determine PVGO by rearranging the stock price formula and subtracting the No-Growth Price from the current stock price:

PVGO = Current stock price - No-Growth Price

PVGO = $36.36 - $7.11 = $29.25

Therefore, the Present Value of Growth Opportunities for Crash, Inc. is $29.25 per share.

Answer 2

4.8%

Step-by-step explanation:

Payout ratio determined the ratio of earning which is paid to the stockholder as dividend.

Payout ratio = Dividend / Earning

0.6 = Dividend / $8

Dividend = $8 x 0.6

Dividend = $4.8

Dividend Valuation method is used to value the stock price of a company based on the dividend paid, its growth rate and rate of return. The price is calculated by calculating present value of future dividend payment.

As we have the value of the bond, we need to calculate the growth rate of dividend using following formula.

Value of Share = Dividend / (Rate of return - Growth rate)

$36.36 = $4.8 / ( 18% - g )

0.18 - g = $4.8 / $36.36

0.18 - g = 0.132

g = 0.18 - 0.132

g = 0.048

g = 4.8%