In Chapter, we expressed the value of a share of stock as where is earnings per share

Question:

In Chapter, we expressed the value of a share of stock as

where is earnings per share from existing assets, r is the expected rate of return required by investors, and PVGO is the present value of growth opportunities. PVGO really consists of a portfolio of expansion options.

(a) What is the effect of an increase in PVGO on the standard deviation or beta of the stock’s rate of return?

(b) Suppose the CAPM is used to calculate the cost of capital for a growth (high- PVGO) firm. Assume all-equity financing. Will this cost of capital be the correct hurdle rate for investments to expand the firm’s plant and equipment, or to introduce new products?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...