A firm has PVGO of 0 and a market capitalization rate of 12%.What is the firm's P/E ratio?

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Quizplus · Accepted Answer

PVGO (Present Value of Growth Opportunities) is the difference between the overall market value of a firm and the value of its current assets. When PVGO equals zero, the value of the firm comes solely from its current operations. The P/E ratio can be calculated by dividing the market capitalization rate by the firm's earnings per share (EPS). Since PVGO is zero, the earnings of the firm will be equal to the market capitalization rate, which is 12%. Therefore, P/E ratio would be 1/12%, which is 8.33.

A Firm Has PVGO of 0 and a Market Capitalization