The market value of Monteregie Corporation's 1 million outstanding common shares is $22.5 million.The firm is expected to have earnings of $1,750,000 next year.The 90-day government T-bill yields 3.75%.What is the present value of growth opportunities (PVGO)if the risk premium is 8.4%?

Question

Quizplus · Accepted Answer

The PVGO is calculated by subtracting the value of the firm as a no-growth firm from its current market value. The required rate of return is the T-bill rate plus the risk premium (3.75% + 8.4% = 12.15%). The no-growth value is earnings divided by the required return ($1,750,000 / 0.1215 = $14.40 million). The PVGO is $22.5 million - $14.40 million = $8.10 million.

The Market Value of Monteregie Corporation's 1 Million Outstanding Common