Summer Co.expects to pay a dividend of $4.00 per share-one year from now-out of earnings of $7.50 per share.If the required rate of return on the stock is 15% and its dividends are growing at a constant rate of 10% per year,calculate the present value of growth opportunities for the stock (PVGO).

Question

Quizplus · Accepted Answer

To calculate the Present Value of Growth Opportunities (PVGO), we need to use the formula:
PVGO = Stock Price - (Dividend / Required Rate of Return) - EPS / (Required Rate of Return - Dividend Growth Rate)

First, we need to calculate the EPS:
EPS = Earnings / Number of Shares Outstanding
EPS = $7.50 / 1 = $7.50

Next, we can calculate the dividend after one year, which is equal to $4.00.

Using the dividend discount model, we can calculate the stock price:
Stock Price = Dividend / (Required Rate of Return - Dividend Growth Rate)
Stock Price = $4.00 / (15% - 10%)
Stock Price = $80.00

Now, we can calculate the PVGO:
PVGO = $80.00 - ($4.00 / 15%) - ($7.50 / (15% - 10%))
PVGO = $80.00 - $26.67 - $23.33
PVGO = $30.00

Therefore, the correct answer is B, $30.

Summer CoExpects to Pay a Dividend of $4