Parcel Corporation expects to pay a dividend of $5 per share next year,and the dividend payout ratio is 50%.If dividends are expected to grow at a constant rate of 8% forever,and the required rate of return on the stock is 13%,calculate the present value of growth opportunities.

Question

Quizplus · Accepted Answer

The present value of growth opportunities (PVGO) is calculated as the difference between the price of the stock with growth and the price without growth. The price without growth is the dividend divided by the required rate of return, which is $5 / 0.13 = $38.46. The price with growth is calculated using the Gordon Growth Model: $5 / (0.13 - 0.08) = $100. The PVGO is $100 - $38.46 = $61.54. However, since the dividend payout ratio is 50%, the dividend used in the calculation should be adjusted to $2.50, leading to a PVGO of $23.08.

Parcel Corporation Expects to Pay a Dividend of $5 Per