If a company has a current stock price of $50, an EPS of $1.75/share; EPS growth rate of 20% and the investors rate of return is 13%, calculate the percentage of share value arising from growth
Opportunities.

Question

Quizplus · Accepted Answer

We can calculate the expected EPS for the next year using the EPS growth rate:
Expected EPS = EPS * (1 + EPS growth rate) = $1.75 * (1 + 0.20) = $2.10

Using the dividend discount model, we can calculate the intrinsic value of the stock based on the expected dividends and the investors rate of return:
Intrinsic value = Expected dividend / (Investor's rate of return - Dividend growth rate)

We can calculate the expected dividend using the payout ratio:
Payout ratio = Dividend / EPS
Dividend = Payout ratio * EPS
Assuming a payout ratio of 50%, we get:
Dividend = 0.50 * $1.75 = $0.875

The dividend growth rate is equal to the EPS growth rate, so it is 20%.

Plugging in the numbers, we get:
Intrinsic value = [$0.875 * (1 + 0.20)] / (0.13 - 0.20) = $23.10

The percentage of share value arising from growth opportunities is:
($23.10 - $1.75) / $23.10 = 0.924 = 92.4%

Therefore, the closest answer is C) 73.1%

If a Company Has a Current Stock Price of $50