Question

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.)

Answer 1

(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”