Answer: $15.33
Explanation:
Present value of growth opportunities = Value of company with growth - Value of company without growth
Value of company with growth:
Using Gordon Growth:
Growth rate = Reinvestment rate * Earnings reinvested
= 20% * 15%
= 3%
Value with growth = ( Earnings * Dividend payout ratio) / (Cost of equity - growth rate)
= (2 * (1 - 20%) ) / (8% - 3%)
= $32.00
Value without growth:
= Earnings / Cost of equity
= 2 / 12%
= $16.67
Present value of growth opportunities = 32 - 16.67
= $15.33
