Question #74
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 29
Status: Unattempted
Part of Context Group: Q73-74
Shared Context
Question
What is the present value of Aultman's future investment opportunities as a percentage of the market price?
Answer Choices:
A. 13.9%
B. 8.1%
C. 36.9%. UC Inc. is a high-tech company that currently pays a dividend of $2.00 per share. UC's expected growth rate is 5%. The risk-free rate is 3% and market return is 9%
Explanation
The present value of the company's future investment opportunities is also known as
PVGO, which can be calculated using the formula: Value = (E / r) + PVGO
where
E = earnings per share
r = required return
(E / r) is the value of the assets in place
Here, $22 = ($2.5 / 0.18) + PVGO
PVGO = $8.11
The PVGO as a percentage of the market price equals ($8.11 / $22.00) = 36.9%.
(Module 20.3, LOS 20.n)
UC Inc. is a high-tech company that currently pays a dividend of $2.00 per share. UC's
expected growth rate is 5%. The risk-free rate is 3% and market return is 9%.