Question

As shown in equation (6.9), the price equation for a firm with positive growth opportunities is


where P0 is the current stock price, X0 is current reported earnings per share, r is the cost of equity capital, and NPVGO is the net present value of future growth opportunities. Recent values of P0, X0, and r for several companies are:


Required:
1. Why does eBay have a higher cost of equity capital (r) than Wal-Mart?
2. Compute NPVGO for each company.
3. Compute NPVGO as a percent of stock price for each company.
4. Why is eBay’s NPVGO as a percent of stock price greater than Home Depot’s? Why is Walmart’s NPVGOnegative?


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  • CreatedSeptember 10, 2014
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