Question #10
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 5
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Xerxes, Inc. forecasts earnings to be permanently fixed at $4.00 per share. Current market price is $35 and required return is 10%. Assuming the shares are properly priced, the present value of growth opportunities is closest to:
Answer Choices:
A. -$5.00
B. +$5.00
C. +$3.50
Explanation
Share price = (no-growth earnings / required return) + PVGO
35 = (4 / 0.10) + PVGO
PVGO = -$5.00