Question

xyz inc has eps of $2.5 next year. Roe is 16% and plowback ratio js 80%. Required return js 14%. what is present value of growth opportunities

Answer 1

EPS is 2.5, plowback ratio is 80%. Means 20% of EPS is distributed as dividend

Dividend paid = 2.5×20%= 0.5

Cost of Equity (Ke) = Dividend / Share price

14%= 0.5 / Share price

Share price = 3.57

Present value of growth opportunities= Stock price - (earnings/cost of Equity)

= 3.57 - (2.5/14%) = -14.29

Present value of growth opportunities can be negative which implies that the company should distribute all its earnings to the shareholders and should not consider taking any project if it is thinking of it.