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11 August, 05:54

Company's Z's earnings and dividends per share are expected to grow indefinitely by 4% a year. Assume next year's dividend per share is $3 and next year's EPS is $4. The market capitalization rate is 8%. If Company Z were to distribute all of its earnings, it could maintain a level dividend stream of $4 a share. How much is the market actually paying per share for growth opportunities?

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  1. 11 August, 08:17
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    First, we need to find current stock price, which equals to Next year dividend / (required rate of return - growth rate)

    =4 / (0.08 - 0.04)

    = $4 / 0.04 = $100

    Then we can apply the found current stock price to find present value of growth opportunities

    Present value of growth opportunities = current stock price - [forcasted Earning per share / required rate of return]

    = $100 - ($4 / 0.08)

    =$100 - $50

    = $50
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