Finding present value of growth opportunities
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Please assist with 3 investment questions (see the attachment) on the present value of growth opportunities and price.
If you can show your work, that would be very helpful.
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Solution Summary
This solution shows how to calculate the price of a stock.
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Study Questions
1. Sisters Corp expects to earn $7 per share next year. The firm's ROE is 19% and its plowback ratio is 50%.
If the firm's market capitalization rate is 10%, what is the present value of its growth opportunities?
In this case,
Earning per share is E=7
The growth rate of the company is g=ROE* plowback ratio = 19%*50% = 9.5%
Cost of capital is r = 10%
Dividend for next period is D1 = E*(1 - plowback ratio)*(1+g) = 7*(1-50%)*(1+9.5%) = 3.83
Then
PVGO = D1/(r-g) - E/r
= 3.83/(10% - 9.5%) - (7/10%)
= 696
2. Even Better Products has come out with a new and improved product. As a result, the ...
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