A firm is currently selling for $50 a share and has a cost of capital of 12%. It has expected earnings of $1.50 a share. What is the present value of its growth opportunities?

Question

Quizplus · Accepted Answer

The present value of growth opportunities can be calculated using the formula: PVGO = (P/E) - r
where P/E is the price-earnings ratio and r is the cost of capital.

In this case, the P/E ratio is 50/1.5 = 33.33
PVGO = (33.33) - 0.12 = 37.5

Therefore, the present value of growth opportunities is $37.50.

A Firm Is Currently Selling for $50 a Share and Has