CD Bargain Barn is forecasting earnings per share of $3.30 next year. Its investors require a return of 15.5%.
a. What is the no-growth value of CD’s stock? (Round your answer to 3 decimal places.)
b. If the stock’s price is currently $29, what is the present value of growth opportunities (PVGO)? (Round your answer to 3 decimal places.)
c. What is the implied P/E ratio for CD’s stock? (Round your answer to 2 decimal places.)
(a)-No-growth value of CD’s stock
No-growth value of CD’s stock = Dividend in next year / Required Rate of Return
= D1 / Ke
= $3.30 per share / 0.1550
= $21.290 per share
“No-growth value of CD’s stock = $21.290”
(b)- Present value of growth opportunities (PVGO)
Present value of growth opportunities (PVGO) = Current Market Price - No-growth value of CD’s stock
= $29.00 per share - $21.290 per share
= $7.710 per share
“Present value of growth opportunities (PVGO) = $7.710”
(c)-Implied P/E ratio for CD’s stock
Implied P/E ratio for CD’s stock = (1 / Required Rate of Return) x [1 + (Present value of growth opportunities / No-growth value of CD’s stock)]
= (1 / 0.1550) x [1 + ($7.710 / $21.290)]
= 6.4516 x 1.3621
= 8.79 Times
“Implied P/E ratio for CD’s stock = 8.79”
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