Answer:
The present value of growth opportunities is $23.08
Explanation:
First, we need to calculate the price with growth
Stock Price = Expected Dividend / ( Required rate of return - growth rate )
Where
Expected Dividend = $5
Required rate of return = 13%
Growth rate = 8%
Pacing values in the formula
Stock Price = $5 / ( 13% - 8% )
Stock Price = $100
Now determine the expected EPS
EPS = Dividend / Payout ratio
Where
Dividend = $5
Payout ratio = 50%
Placing values in the formula
EPS = $5 / 50%
EPS = $10
Now calculate the present value of growth opportunity
PV of Growth opportunity = Price with growth - ( EPS / Required rate of return )
Where
Price with growth = $100
EPS = $10
Required rate of return = 13%
Placing value in the formula
PV of Growth opportunity = $100 - ( $10 / 13% )
PV of Growth opportunity = $100 - $76.92
PV of Growth opportunity = $23.08