If a company has a current stock price of $78, an EPS of $1.10/share; EPS growth rate of 20% and the investors rate of return is 11.50%, calculate the percentage of share value arising from growth
Opportunities.

Question

Quizplus · Accepted Answer

Using the Gordon Growth Model formula, we can calculate the intrinsic value of the stock as follows:
Intrinsic value = (EPS * (1 + EPS growth rate)) / (investor's rate of return - EPS growth rate)
Intrinsic value = ($1.10 * 1.20) / (0.115 - 0.20) = $23.76
Now, we can calculate the percentage of the current stock price that is attributed to growth opportunities using the following formula:
Percentage of share value arising from growth = ((Intrinsic value - Current stock price) / Current stock price) * 100%
Percentage of share value arising from growth = (($23.76 - $78) / $78) * 100% = -67.85%
However, since the EPS growth rate is higher than the investor's rate of return, this result is negative, indicating that the stock is overvalued. Therefore, we can conclude that none of the answer choices provided are correct.

If a Company Has a Current Stock Price of $78