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A company will earn $3 next year and should be able to pay out 30% as dividend
A company will earn $3 next year and should be able to pay out 30% as dividend. The company is expected to grow at 6% and has a cost of equity of 15%. What is the present value of growth opportunity for this company?
Select one:
a. $5
b. $10
c. -$5
d. -$10
Expert Solution
Answer (d ) -$10
EPS =$3
Dividend Payout Ratio =30%
Growth(g) =6%
Cost of Equity(Ke)=15%
Present value of growth opportunity=?
Solution
Dividend (D??????1?????)=EPS*Dividend Payout Ratio
=$3*30%
=$0.9
Value of share without growth=EPS/Cost of Equity=3/15%
=3/.15
=$20
Value of share with growth =(D??????1)/K?e -g
=$0.9/(15%-6%)
=$0.9/9%
=$10
Present value of growth opportunity
=Value of share with growth- value of share without growth
=$10 -$20
= -$10
Hence,present value of growth opportunity is -$10
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