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ABC corp. has an ROE of 14%. It's forecasted next period earning is $10/share and dividend...

ABC corp. has an ROE of 14%. It's forecasted next period earning is $10/share and dividend is $6/share. Assume the cost of capital is 10%. What's the PVGO for ABC corp.?

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Answer #1

Payout Ratio = Next Year Dividend / Next Year Earnings
Payout Ratio = $6 / $10
Payout Ratio = 0.60

Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.60
Retention Ratio = 0.40

Growth Rate = ROE * Retention Ratio
Growth Rate = 14% * 0.40
Growth Rate = 5.60%

Cost of Capital = 10.00%

Price with Growth = Next Year Dividend / (Cost of Capital - Growth Rate)
Price with Growth = $6.00 / (0.10 - 0.056)
Price with Growth = $6.00 / 0.044
Price with Growth = $136.36

Price without Growth = Next Year Earnings / Cost of Capital
Price without Growth = $10.00 / 0.10
Price without Growth = $100.00

Present Value of Growth Opportunities = Price with Growth - Price without Growth
Present Value of Growth Opportunities = $136.36 - $100.00
Present Value of Growth Opportunities = $36.36

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