Which of the following is more likely to be responsible for a firm having low PVGO?
A) ROE exceeds required return.
B) Plowback is very high.
C) Payout is very high.
D) Book value of equity is low.

Question

Quizplus · Accepted Answer

PVGO (Present Value of Growth Opportunities) is the difference between the current price of a stock and the present value of expected future earnings. If a firm has a very high payout ratio (C), it means that it is distributing a major portion of its earnings to the shareholders as dividends. This reduces the retained earnings, which in turn reduces the expected future earnings and leads to a lower PVGO. Therefore, option C is the most likely choice for a firm having low PVGO. The other options, such as a high plowback ratio (B), a low book value of equity (D), or a high ROE (A), may or may not impact the PVGO of a firm, depending on the nature of the business and other factors.

Which of the Following Is More Likely to Be Responsible