Question

firm z expects to earn $5 per share next year the firms roe is 15% and its plowback ratio is 70% if the firms market capitalization rate is 12% what is the present value of growth opportunities

Answer 1

present value of growth opportunities is −$8.34

Step-by-step explanation:

Value with no growth = expected earning / capitalization rate

Value with no growth = $5/0.12 = $41.67

Growth rate = retention rato * ROE

Growth rate = 0.7 * 15 = 10.5%

Value with growth = $5*(1-0.7)/(0.15-0.105) = $33.33

Therefore present value of growth opportunities = Value with growth - Value with no growth

PVGO = $33.33-$41.67 = −$8.34