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firm z expects to earn $5 per share next year the firms roe is 15% and its plowback ratio is 70% if the firms market capitalization rate is 12% what is the present value of growth opportunities

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oyejam

Answer:

present value of growth opportunities is −$8.34

Explanation:

Value with no growth = expected earning / capitalization rate

Value with no growth = $5/0.12 = $41.67

Growth rate = retention rato * ROE

Growth rate = 0.7 * 15 = 10.5%

Value with growth = $5*(1-0.7)/(0.15-0.105) = $33.33

Therefore present value of growth opportunities = Value with growth - Value with no growth

PVGO = $33.33-$41.67 = −$8.34

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