Suppose that Bookface has earnings per share (expected next year) of $6.20 and that Bookface’s discount rate for equity is 12%. Instead of your answer above, Bookface is trading at $160 per share. What is the present value of Bookface's growth opportunities per share? Do not include the $ sign and answer to the nearest $0.01.
Question
Suppose that Bookface has earnings per share (expected next year) of 160 per share. What is the present value of Bookface's growth opportunities per share? Do not include the 0.01.
Solution
To calculate the present value of Bookface's growth opportunities per share, we first need to calculate the present value of Bookface's earnings per share.
Step 1: Calculate the present value of earnings per share The present value (PV) of Bookface's earnings per share can be calculated using the formula:
PV = EPS / r
where: EPS = Earnings per share (expected next year) = $6.20 r = Discount rate for equity = 12% = 0.12
So, PV = 51.67
Step 2: Calculate the present value of growth opportunities per share The present value of growth opportunities per share can be calculated by subtracting the present value of earnings per share from the current trading price per share.
So, PVGO = P - PV
where: P = Current trading price per share = 51.67
So, PVGO = 51.67 = $108.33
Therefore, the present value of Bookface's growth opportunities per share is $108.33.
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