Dream Homes Corporation had net earnings of $200,000 this past year and paid $80,000 in dividends on the company's equity of $1,800,000.Dream Homes has 500,000 shares outstanding with a current market value of $5.What is the firm's present value of growth opportunities if the required rate of return is 10.08 percent?

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Quizplus · Accepted Answer

Compute retention ratio =1−$80,000/$200,000 = 60%,ROE = $200,000/$1,800,000 = 11.1111%,G = 60%*11.11% = 6.6667%,EPS₁ = ($200,000/500,000)*(1+6.67%)= $0.4267,Then PVGO = $5−$0.4267/10.08% = $0.77

Dream Homes Corporation Had Net Earnings of $200,000 This Past