Question

Parcel Corporation expects to pay a dividend of $5 per share next year, and the dividend payout ratio is 50 percent. If dividends are expected to grow at a constant rate of 8 percent forever, and the required rate of return on the stock is 13 percent, calculate the present value of growth opportunities.

Answer 1

Answer:

The present value of growth opportunities is $23.08

Explanation:

First, we need to calculate the price with growth

Stock Price = Expected Dividend / ( Required rate of return - growth rate )

Where

Expected Dividend  = $5

Required rate of return = 13%

Growth rate = 8%

Pacing values in the formula

Stock Price = $5 / ( 13% - 8% )

Stock Price = $100

Now determine the expected EPS

EPS = Dividend / Payout ratio

Where

Dividend = $5

Payout ratio = 50%

Placing values in the formula

EPS = $5 / 50%

EPS = $10

Now calculate the present value of growth opportunity

PV of Growth opportunity = Price with growth - ( EPS / Required rate of return )

Where

Price with growth = $100

EPS = $10

Required rate of return = 13%

Placing value in the formula

PV of Growth opportunity = $100 - ( $10 / 13% )

PV of Growth opportunity = $100 - $76.92

PV of Growth opportunity = $23.08