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Company's Z's earnings and dividends per share are expected to grow indefinitely by 3% a year....

Company's Z's earnings and dividends per share are expected to grow indefinitely by 3% a year. Assume next year's dividend per share is $2 and next year's EPS is $3. The market capitalization rate is 9%. If Company Z were to distribute all of its earnings, it could maintain a level dividend stream of $3 a share. How much is the market actually paying per share for growth opportunities? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.)

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Answer #1

Current stock price = Dividend / ( Capitalization rate -Growth rate)

= 2/ ( 0.09 -0.03)

= 33.33

Present Value of Growth Opportunities = Current Stock price - (EPS / Capitalization rate)

= 33.33 - (3/0.09)

= $0

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