Firm A has a stock price of $35, and 60% of the value of the stock is in the form of PVGO. Firm B also has a stock price of $35, but only 20% of the value of stock B is in the form of PVGO. We know that:
I. Stock A will give us a higher return than Stock B.
II. An investment in stock A is probably riskier than an investment in stock B.
III. Stock A has higher forecast earnings growth than stock B.

Question

Quizplus · Accepted Answer

II and III onlyPVGO (Present Value of Growth Opportunities) indicates the portion of a stock's price that is attributed to future growth opportunities. A higher PVGO percentage (as in Stock A) suggests higher expected growth, making Statement III correct. Higher growth often comes with higher risk, making Statement II correct. Statement I is not necessarily true because a higher return is not guaranteed by a higher PVGO percentage alone; it also depends on how those growth opportunities materialize and other factors.

Firm a Has a Stock Price of $35, and 60