Value of Growth Opportunities A firm has projected annual earnings per share of
ID: 2795962 • Letter: V
Question
Value of Growth Opportunities A firm has projected annual earnings per share of $5.00 and a dividend payout ratio of 65%. The firm's required return is 18% and dividends and earnings are expected to grow at 3% per year indefinitely. For this firm the present value of its growth opportunities is ________.
$49.44
$52.73
$12.22
$37.22
Multistage Growth A firm projects that dividends will grow at a rate of 13% per year for four years and then will grow at a rate of 6% per year forever. The stock's required return is 15% and the last annual dividend paid was $1.30. The most an investor should be willing to pay for this stock today is ______. (Watch your rounding, carry out dividends to four or more decimal places.)
$17.31
$19.25
$23.92
$22.59
Value of Growth Opportunities A firm has projected annual earnings per share of $5.00 and a dividend payout ratio of 65%. The firm's required return is 18% and dividends and earnings are expected to grow at 3% per year indefinitely. For this firm the present value of its growth opportunities is ________.
Explanation / Answer
1
Expected dividends=5*65%=3.25
Price without growth=D1/r=3.25/18%=18.056
Price with growth=3.25/(18%-3%)=21.67
Hence, Present Value of Growth opportunities=21.67-18.056=3.614
2
D1=1.3*(1+13%)=1.469
D2=1.469*(1+13%)=1.65997
D3=1.65997*(1+13%)=1.875766
D4=1.875766*(1+13%)=2.119616
D5=2.119616*(1+6%)=2.246793
Horizon value=2.246793/(15%-6%)=24.96437
Price=D1/(1+r)+D2/(1+r)^2+D3/(1+r)^3+D4/(1+r)^4+Horizon Value/(1+r)^4
=1.469/1.15+1.65997/1.15^2+1.875766/1.15^3+2.119616/1.15^4+24.96437/1.15^4
=19.25127
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