Parcel Corporation expects to pay a dividend of $5 per share next year, and the dividend payout ratio is 50 percent. If dividends are expected to grow at a constant rate of 8 percent forever, and the required rate of return on the stock is 13 percent, 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 of the stock without growth. The price of the stock with growth is calculated using the Gordon Growth Model: P = D1 / (r - g) = $5 / (0.13 - 0.08) = $100. The price of the stock without growth is calculated as the earnings per share divided by the required rate of return: EPS = D1 / payout ratio = $5 / 0.5 = $10, so P0 = $10 / 0.13 = $76.92. Therefore, PVGO = $100 - $76.92 = $23.08.

Parcel Corporation Expects to Pay a Dividend of $5 Per