Question

ABC Corporation expects to pay a dividend of $2 per share next year, and the dividend payout ratio is 80 percent. Dividends are expected to grow at a constant rate of 8 percent forever.Suppose the company's equity beta is 1.21, the market risk premius is 9%, and the risk free rate is 5%. Calculate the present value of growth opportunities.

Answer 1

Expected dividend next year(D1) = $2

Expected Earning per share next year(E1) = Expected dividend next year/Dividend payout ratio

= $2/80%  = $2.5

- Constant Dividend Growth rate(g) = 8% per yaer forever

As per CAPM,

where, rf = Risk free return = 5%

Rmp = Market Risk premium= 9%

beta = 1.21

Required rate of Return = 5% + 1.21(9%)

Required rate of Return(ke) = 15.89%

Calculating the Present Value of Growth Opportunities(PVGO):-

PVGO = $9.62

So, the present value of growth opportunities is $9.62

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