Im taking a corporate finance class at NYU and I cant for the life of me solve this problem. Keep in mind I am an accounting guru and have little valutaion experience. Need some help!
The Hedda Company has current earnings of $2.00 per share. The company plans to reinvest 30% of its annual earnings. Hedda’s cost of capital is 10% and stock price is currently $20.
a. What is Hedda’s return on retained earnings?
b. What is the value of Hedda’s growth opportunities?
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Hey there are equations for this type of stuff. you simply need to solve for either ROE which is synonymous for r and also growth which is synonymous for g. To answer your second question look up the concept of PVGO (present value of growth opportunities). This is really easy man just review.
I appreciate your help but I am rather confused... Oh well
Would someone be so kind as to help or at least explain?
Please can someone help?
The Hedda Company has current earnings of $2.00 per share. The company plans to reinvest 30% of its annual earnings. Hedda’s cost of capital is 10% and stock price is currently $20. a. What is Hedda’s return on retained earnings? b. What is the value of Hedda’s growth opportunities?
payout rate = 0.7
growth rate = 0.3 x 0.1
Stock price = ((2x0.7)x(1+0.3x0.1))/0.1-0.03
PVGO = Stock price - 2/0.1
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