Please show equation and explain Calculate the Present Value of Growth Opportuni

Question

Please show equation and explain

Calculate the Present Value of Growth Opportunities [PVGO] based on: Earnings Per Share = $8.00, Required Rate of Return = 14%, Dividends Per Share = $1.50, Return on Equity = 16%.

A company's 12-month trailing earnings per share [EPS] are $4.50, and is expected to grow 10% annually. If an investor is willing to pay a P/E multiple that is no higher than 2.5 times its growth rate, and the stock is currently selling at $100 per share, would this be an acceptable purchase price? Explain and support your answer with numbers.

Explanation / Answer

PVGO = ROE – Required Rate of Return

Required rate of return =14%

Return on Equity =16%

Hence PVGO =16%-14% =2%

2nd part

The Highest P/E Multiple would be = 2,5* growth rate

=2.5*10

= 25

Hence maximum p/e which an investor is willing to pay is 25

EPS = 4.5

Hence maximum price he is willing to pay =4.5*25= 112.5

Current price $100 is lower than $125 hencehe woud buy the share

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