Consider a company that has earnings per share of $3.50, a required rate of return of 10 percent, expected earnings growth of 4 percent per year, and a current stock price of $40 per share. The present value of growth opportunities is closest to:

Question

Quizplus · Accepted Answer

The present value of growth opportunities (PVGO) is calculated as the difference between the current stock price and the value of the stock without growth. The value of the stock without growth can be calculated using the dividend discount model for a perpetuity, which is $ \frac{EPS}{r} $, where EPS is the earnings per share and $ r $ is the required rate of return. Here, $ \frac{3.50}{0.10} = 35 $. The current stock price is $40, so the PVGO is $ 40 - 35 = $5.00 $ per share. However, the correct calculation leads to the conclusion that none of the provided choices exactly match the correct calculation based on the given explanation. The correct calculation indicates a discrepancy in the provided choices, suggesting a need for recalculating or reassessing the given options based on the standard formula for PVGO.

Consider a Company That Has Earnings Per Share of $3