Next year's earnings are estimated to be $5. the company plans to reinvest 20% of its...

Next year's earnings are estimated to be $5. the company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9% what is the present value of growth opportunities?

A. $9.09

B. $10.10

C. $11.11

D. $12.21

Expert Solution

Ans $ 11.11

GROWTH = ROE * RETENTION RATIO = 15% * 20% = 3%

VALUE OF GROWTH = (EPS* DIVIDEND PAYOUT RATIO) / (COST OF EQUITY - GROWTH)

= (5 * 80%) / ( 9% - 3%)

= 66.67

VALUE OF GROWTH = DIVIDEND / COST OF EQUITY

= 5 / 9%

= 55.56

PRESENT VALUE OF GROWTH OPPORTUNITIES = $ 66.67 - $ 55.56

= $ 11.11

jeff jeffy answered 1 year ago

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