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Marsh
10-21-2013, 02:09 PM
Hey guys,

Im kind of stuck on this question, I think I might just have a brain fart but can't seem to find a way to solve it...any help would be appreciated.

It is Corporate Finance btw.

"The shares of Giant Film Company shares trade at $29 with earnings of $3 per share and a required return of 10 percent. Calculate the present value of growth opportunities as a percentage of the market price."

What formula(s) do I need to use?

woodywoodford
10-21-2013, 04:55 PM
Share Price = PV(earnings with no growth) + NPVGO

So

$29 = $3 at 10% in perpetuity + NPVGO

NPVGO = 29 - 3/0.1

NPVGO = -$1

-3.45%


I always get uneasy with negative answers though, so hopefully it's MC or you can check the formula. Been a few months since I did this stuff.

Marsh
10-21-2013, 11:21 PM
Thanks Woody, yeah I ended up finding the formula and got the same anwser as you. It was part of a homework assignment question, so usually the prof puts messed up numbers on purpose so that you can build confidence that you know what you are doing and stand behind your anwser.

Thanks Again

Marsh