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    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.

    © BrainMass Inc. brainmass.com October 2, 2020, 5:02 am ad1c9bdddf


    Solution Preview

    Please see the attachment for the solution.

    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

    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 ...

    Solution Summary

    This solution shows how to calculate the price of a stock.