PVGO, V0 or V1? examples

anothercfainnyc

when solving for PVGO do we use stock value at time V0 or V1? I've seen examples with both. thought the formula was V0 - (E/r)

thanks. keep pluggin away....

John

cv4cfa

There was a huge discussion about this last year.

Otabek

Chuckrox8 Wrote:
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> There was a huge discussion about this last year.


welcome to the weeds. enjoy your stay.

bbtomato

thanks. mistakenly took dividend for next year to be associated with next year's estimated price as opposed to current.

safe to assume PVGO will be negative when ROE is less than r?

yodacaia

safe to assume PVGO will be negative when ROE is less than r <<-- how are you coming to this conclusion?


PVGO = present value of future growth, if its 0 there is no future growth,

ROE = 5%
Equity = 1000

Earnings = .10*1000 = 100
let's say r = 10%

V0 = 50/.1 + PVGO
let's say pvgo =0;

then you have value of stock = 500. nothing wrong with it. each year you'll generate 50 bucks and distribute it as dividend. ROE < r but PVGO is 0.

5566

pepp Wrote:
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> safe to assume PVGO will be negative when ROE is
> less than r <<-- how are you coming to this
> conclusion?
>

because it's destroying shareholder value by producing returns below required rates of return.

the original poster is correct in his underlying assumption about how the math works. but the term itself, "present value of growth opportunities" makes me think it would be highly unlikely to be presented in the exam in such a format where PVGO is negative in value.

SeanWest

It would have to be V0, because you're finding the present value of growth opportunities at t = 0 (ie right now).