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Brothers Corp expects to earn $6 per share next year. The firm’s ROE is 15% and...

Brothers Corp expects to earn $6 per share next year. The firm’s ROE is 15% and its plowback ratio is 50%. If the firm’s market capitalization rate is 13%, what is the present value of its growth opportunities?

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Answer #1

Plowback Ratio = 50%

This means, dividends expected = Earnings per share * (1 - Plowback Ratio) = $6 * (1 - 50%) = $3

Growth rate = ROE * Plowback Ratio = 15% * 50% = 7.5%

Assuming growth = 0

When g = 0

PVGO = $54.55 - $23.08 = $31.47

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