Question

Summer Co. expects to pay a dividend of $4.00 per share—one year from now—out of earnings of $7.50 per share. If the required rate of return on the stock is 15 percent and its dividends are growing at a constant rate of 10 percent per year, calculate the present value of growth opportunities for the stock (PVGO). (Hint 1: b =1- Dividend/Earnings) (Hint 2: you will need to re-arrange g=ROE x b to get ROE!) Group of answer choices $50 $80 $30 $26

133

likes
666 views

Answer to a math question Summer Co. expects to pay a dividend of $4.00 per share—one year from now—out of earnings of $7.50 per share. If the required rate of return on the stock is 15 percent and its dividends are growing at a constant rate of 10 percent per year, calculate the present value of growth opportunities for the stock (PVGO). (Hint 1: b =1- Dividend/Earnings) (Hint 2: you will need to re-arrange g=ROE x b to get ROE!) Group of answer choices $50 $80 $30 $26

Expert avatar
Ali
4.4
90 Answers
**Step 1: Calculate Retention Ratio**
Given formula:
b = 1 - \frac{D}{E}
Given values:
D = \ (D1)
E = \
Substitute values:
b = 1 - \frac{4.00}{7.50}
b = 1 - 0.5333
b \approx 0.4667

**Step 2: Calculate Return on Equity (ROE)**
Given relationship:
g = ROE \times b
Given growth rate:
g = 10\% or 0.10
Substitute retention ratio:
0.10 = ROE \times 0.4667
ROE = \frac{0.10}{0.4667}
ROE \approx 0.214 or 21.4\%

**Step 3: Calculate Stock Price ( P )**
Using Gordon Growth Model:
P = \frac{D_1}{r - g}
Given values:
D_1 = \
r = 15\% or 0.15
g = 10\% or 0.10
Substitute values:
P = \frac{4.00}{0.15 - 0.10}
P = \frac{4.00}{0.05}
P = \

**Step 4: Calculate PVGO**
Using PVGO formula:
PVGO = P - \frac{E}{r}
Given values:
P = \
E = \
r = 15\% or 0.15
Substitute values:
PVGO = 80.00 - \frac{7.50}{0.15}
PVGO = 80.00 - 50.00
PVGO = \

Answer:
The present value of growth opportunities (PVGO) for the stock is approximately $30.

Frequently asked questions (FAQs)
Math question: What is the derivative of f(x) = sin(x) + ln(x) - e^x
+
What is 60% of 125?
+
What is the maximum value of the quadratic function f(x) = -2x^2 + 4x + 3 when graphed?
+
New questions in Mathematics
5(4x+3)=75
what is 9% of 307
Determine the correct value: A company knows that invoices pending collection have a normal distribution with a mean of $1.65 million, with a standard deviation of $0.2 million, then: The probability that an invoice pending collection has an amount that is within more than 2 deviations below the mean, is:
(5-(4-3)*3)-(8+5))
"If three wolves catch three rabbits in three hours, how many wolves would it take to catch a hundred rabbits in a hundred hours?" The answer is the number of response units.
How long will it take for $900 to become $5000 at an annual rate of 11.15% compounded bimonthly?
A pair of die is thrown and the absolute difference of the two scores is recorded. What is the probability of the absolute difference being 4 or more?
3. A rock is dropped from a height of 16 ft. It is determined that its height (in feet) above ground t seconds later (for 0≤t≤3) is given by s(t)=-2t2 + 16. Find the average velocity of the rock over [0.2,0.21] time interval.
X³-27
Buffalo Company makes and sells shampoo. Each unit requires $1.40 labor costs, material costs per unit are $0.90 and other variable costs are $0.30. It sells shampoo for $4.45 to retailers. Fixed costs are $15,000. It sold 25,000 units in the current month. What is the Break-Even point in units? What is the Break-Even point in dollars? What is the contribution margin of Buffalo Company?
Jasminder has made 55% of the recipes in a particular cookbook. If there are 9 recipes that he has never made, how many recipes does the cookbook contain?
Build a truth table for the statement ~(pvq)^~p
2x2
00 piece jigsaw puzzle. the completed puzzle is 10x10. each piech connects to at least 2 other pieces. i plan to assemble by taking pieces out of box one by one. if i've already taken out 2 pieces that dont directly connect, what is the minimum number of additional pieces that i need to draw to in order to guarentee that the original 2 pieces connect?
Find I (Intrest) using simple interest formula of 17700 @ 15% for 4 years
A confidence interval for a population mean has a margin of error of 3.5. a. Determine the length of the confidence interval. b. If the sample mean is 47.8 ​, obtain the confidence interval. a. The length of the confidence interval is?
Hola👋🏻 Toca en "Crear Nueva Tarea" para enviar tu problema de matemáticas. ¡Uno de nuestros expertos comenzará a trabajar en ello de inmediato!
Slope (7,3) and (9,5)
The supply of a good registers periodic increases. With each increase in the offer, the total receipts of the bidders increase. Indicate the correct statement: a) demand is elastic b) demand is inelastic c) supply is inelastic d) supply has unit elasticity.
An invoice for €2,880 plus default interest of €48.40 was paid on October 28th. Interest rate 5.5%. When was the bill due?