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

Question

Quizplus · Accepted Answer

PVGO (or present value of growth opportunities) is equal to zero, which means that the firm's current stock price is entirely based on its current earnings. The market capitalisation rate is 12%, which is effectively the investor's required rate of return. Therefore, the P/E ratio can be calculated as 1/MC, where MC is the market capitalisation rate. Hence, P/E ratio = 1/0.12 = 8.33. Therefore the correct option is B.

A Firm Has PVGO of 0 and a Market Capitalisation