As shown in equation (6.10), the price equation for a firm with positive growth
ID: 2810802 • Letter: A
Question
As shown in equation (6.10), the price equation for a firm with positive growth opportunities is X, where Po is the current stock price, X, is current reported earnings per share, r, is the cost of equity capital, and NPVGO is the net present value of future growth opportunities. Recent values of Po, X0, and r for several companies are: Brunswick eBay Home Depot Walmart Walgreens Boots Alliance $45.46 26.21 127.49 63.62 81.82 $2.61 1.84 5.33 4.67 4.11 0.095 0.074 0.067 0.044 0.086 Required: 1. Why does eBay have a higher cost of equity capital (r) than Wal-Mart? 2. Compute NPVGO for each company 3. Compute NPVGO as a percent of stock price for each company. 4. Why is eBay's NPVGO as a percent of stock price less than Home Depot's? 5. Why is Walmart's NPVGO negative?Explanation / Answer
Answer) 2and 3
Answer 1) As eBay is growing company and growth rate is much higher than Wal-Mart , required much capital from market . To attract high volume of equity the cost of equity is comparetively higher.
Answer4) Due to low earning per share and high cost of equity , the current price has impact . The Home-Depot have comparetivly high potential growth in market.
Answer 5) As the Walmart is currently claimed to be leader in the industry of organized retail and shop , the company holds the maximum market share of industry , so very less future opportunities left for growth . Company has the lowest cost of equity . That's why ,NPVGO is negative for the company.
Company P0 X0 Rc NPVGO NPVGO(%) To P0 Brunswick $45.46 $2.61 0.095 $17.99 39.565% eBay $26.21 $1.84 0.074 $1.35 5.132% Home Depot $127.49 $5.33 0.067 $47.94 37.601% Walmart $63.62 $4.67 0.044 ($42.52) -66.829% Walgreens Boots Alliance $81.82 $4.11 0.086 $34.03 41.590%Related Questions
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