Asked by mahesh likhe on Jul 20, 2024
Verified
Recent values of P0 (current stock price),X0 (current reported EPS),and r (equity cost of capital)for Alpha Company follow:
P0Xor$23.50$1.470.150\begin{array}{ccc}P_{0} & X_{o} & \boldsymbol{r} \\\$ 23.50 & \$ 1.47 & 0.150\end{array}P0$23.50Xo$1.47r0.150
Required:
Compute Alpha's NPVGO (net present value of future growth opportunities).
NPVGO
Net Present Value of Growth Opportunities refers to the present value of all future cash flows that a new project is expected to generate after accounting for the initial investment cost.
Equity Cost Of Capital
The rate of return that shareholders require on the equity or ownership interest they have in a company, used in evaluating investments and capital projects.
- Comprehend the determinants that influence a company's Price to Earnings ratio and performance in the stock market.
Verified Answer
KG
Kimberly GarciaJul 20, 2024
Final Answer :
To find the NPVGO for Alpha Company,solve the following expression: P0=X0r+ P_{0}=\frac{X_{0}}{r}+ P0=rX0+ NPVGO Rearranging terms yields:
P0−X0r=NPVGO=$23.50−($1.47÷0.15)=$13.70 P_{0}-\frac{X_{0}}{r}=\mathrm{NPVGO}=\$ 23.50-(\$ 1.47 \div 0.15)=\$ \mathbf{1 3 . 7 0} P0−rX0=NPVGO=$23.50−($1.47÷0.15)=$13.70
P0−X0r=NPVGO=$23.50−($1.47÷0.15)=$13.70 P_{0}-\frac{X_{0}}{r}=\mathrm{NPVGO}=\$ 23.50-(\$ 1.47 \div 0.15)=\$ \mathbf{1 3 . 7 0} P0−rX0=NPVGO=$23.50−($1.47÷0.15)=$13.70
Learning Objectives
- Comprehend the determinants that influence a company's Price to Earnings ratio and performance in the stock market.