The Montreal Film Festival Company has a book value per share of $10 and a current return on equity of 7%.The firm expects to invest $100 next year and earn a return of 10% on that investment.The market requires a rate of return of 5% on the firm's equity.Given this information, what are the present value of existing opportunities (PVEO)and the present value of growth opportunities (PVGO)?

Question

Quizplus · Accepted Answer

To calculate the PVEO, we need to use the formula:

PVEO = EPS / r

where EPS is the current earnings per share and r is the required rate of return.

Using the given data, we can calculate the PVEO as:

PVEO = $10 / 5% = $200

To calculate the PVGO, we need to use the formula:

PVGO = (ROE - r) / (r - g) * EPS

where ROE is the return on equity, g is the expected growth rate, and EPS is the current earnings per share.

Using the given data, we can calculate the PVGO as:

PVGO = (7% - 5%) / (5% - 10%) * $10 = -$28

Since we have a negative PVGO, it means that the market is valuing the firm's growth opportunities at a negative value. This implies that the firm is not expected to create value with future investments.

Therefore, the best choice is B, where PVEO = $14.00 and PVGO = -$28.00.

The Montreal Film Festival Company Has a Book Value Per