Next year's earnings are estimated to be $4. The company plans to reinvest 20% of its...
Next year's earnings are estimated to be $4. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 10%, what is the present value of growth opportunities?
Homework Answers
present value of growth opportunities = Stock price - Earnings/cost of equity
growth rate = 20% * 15% = 3%
Stock price = Dividend next year/(cost of equity - growth rate)
= 4 * 0.8/0.1-0.03
= 45.71
Present value of growth opportunities
= 45.71 - 4/10%
= 5.71
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