Question

Next year's earnings are estimated to be $5. The company plans to reinvest 25% of its earnings at 20%. If the cost of equity is 12%, what is the present value of growth opportunities?

Answer 1

The present value of growth opportunities is 11.90.

The act or process, or a manner of developing; development; gradual increase. length or level of improvement: It hasn't but reached its complete increase. Finished improvement. Improvement from a less complicated to a greater complex degree: the growth of formality paperwork.

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Growth is an increase or decrease in something. It's miles modeled the usage of lessons of mathematical functions including linear, exponential, logarithmic, and hyperbolic boom. the increase also can be categorized as consistent with its first-rate effect on a commercial enterprise or network.

Growth = Reinvestment * 20% = 25%*20% = 5%

Price = Dividend Next Year/( Cost of Equity - Growth) = 5*(1-25%)/(12%-5%) = 53.57

PVGO = Price - Earning/Cost of Equity = 53.57 - 5/12% = 11.90

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