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AUS Inc. has come out with a new and improved product. As a result, the firm...

AUS Inc. has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock. What is the present value of growth opportunities for AUS Inc.?

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Answer #1
First we will find the price of the share as below :-
Price of the share is = ((Earnigs per share*(1-Plow back ratio))/(Expeced rate of return-(ROE*Plowback ratio)))
Price of the share is = ((3*(1-0.20))/(0.12-(0.25*0.20)))
Price of the share is = (2.40/0.07)
Price of the share is = $ 34.285714
Price of the share is = $ 34.29/. Rounded to two decimals
Present value of growth opportunities = Price of the share-(Earnings per share/Expected rate of return)
Present value of growth opportunities = 34.29-(3/0.12)
Present value of growth opportunities = 34.29-25.00
Present value of growth opportunities = $ 9.29/.
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