Ambiance Company has a current market price of $42, a current dividend of $1.25 and a required rate of return of 12%. All earnings are paid out as dividends. What is the present value of Ambiance’s growth opportunities (PVGO)?
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The PVGO is $31.58:PVGO = $42 – ($1.25 / 0.12) = $31.58
Obsidian Glass Company has current earnings of $2.22, a required return of 8%, and the present value of growth opportunities (PVGO) of $8.72. What is the current value of Obsidian’s shares?
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The current value is $36.47. V0 = ($2.22 / 0.08) + $8.72 = $36.47
Tri-coat Paints has a current market value of $41 per share with a earnings of $3.64. What is the present value of its growth opportunities (PVGO) if the required return is 9%?
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The PVGO is $0.56:PVGO = $41 – ($3.64 / 0.09) = $0.56
The required rate of return for an asset is often difficult to determine, but if we know the growth prospects and the current earnings of a firm we can determine the implied required rate of return from the:
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The required rate of return is implicit in the asset’s market price and can be determined with the present value of growth opportunities.
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