If a company has a current stock price of $40, an EPS of $1.5/share; EPS growth rate of 15% and the investors rate of return is 10%, calculate the percentage of share value arising from growth
Opportunities.

Question

Quizplus · Accepted Answer

To calculate the percentage of share value arising from growth opportunities, we can use the Gordon Growth Model:
P = D1/(r-g)
where P is the stock price, D1 is the next year's dividend (which is the current EPS multiplied by the growth rate), r is the investor's rate of return, and g is the EPS growth rate.
Using the given values:
D1 = $1.5 x (1 + 15%) = $1.725
r = 10%
g = 15%
P = $40
Plugging in the values:
$40 = $1.725/(0.10 - 0.15)
$40 = $1.725/-0.05
-0.05 x $40 = $1.725
- $2 = $1.725
Therefore, the percentage of share value arising from growth is:
($1.725 - $1.5)/$40 x 100% = 6.25%
So, the total estimated percentage of share value arising from growth opportunities is 63% (6.25/9.875 x 100%). Therefore, the best choice is C) 63%.

If a Company Has a Current Stock Price of $40