Reading 41: Discounted Dividend Valuation- LOS f～ Q1-4 current, required, interpret, present, leading

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LOS f: Calculate and interpret the present value of growth opportunities (PVGO) and the component of the leading price-to-earnings (P/E) related to PVGO, given nogrowth earnings per share, earnings per share, the required rate of return, and the market price of the stock (or value of the stock).

Q1. 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)?

A)   $31.58.

B)   $38.85.

C)   $16.71.

 

Q2. 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?

A)   $57.17.

B)   $36.47.

C)   $10.94

 

Q3. 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%?

A)   $3.92.

B)   $0.56.

C)   $1.27.

 

Q4. 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:

A)   dividend rate.

B)   market price.

C)   earnings retention rate.

 

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