Question: Suppose we consider a firm with positive net present value of growth opportunities. We saw that the price of the stock could be expressed as

Suppose we consider a firm with positive net present value of growth opportunities. We saw that the price of the stock could be expressed as follows:

P = EPS/i +NPVGO

If we divide each side of the equation by the firm’s earnings per share, we arrive at a P/E ratio for which we could use to compare firms which have similar P/E multiples. However, this begs the question of just how comparable these firms are to each other. Explain how each of those determinants plays a part across supposedly similar firms.

Step by Step Solution

★★★★★

3.38 Rating (164 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

NPVGO can be used ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Consider a firm with a contract to sell an asset for $ 115,000 three years from now. The asset costs $ 76,000 to produce today. Given a relevant discount rate on this asset of 13 percent per year,...

If the expected net present value of returns from an investment project is $50,000, what is the maximum price that a risk-neutral investor would pay for it? Explain.

If an investor observes that the price of a stock trading in one exchange is different from the price in another exchange, what form of arbitrage is applicable, and how can the investor participate...

SOMEONE PLEASE HELP ME GIVE ALL THE ANSWERS!!!!! MY EXAM IS ON 13th MORNING! SO PLEASEEEEE!!!!! 2. An investment is expected to pay the following: C 1 = $2,300, C 2 = $2,600, C 3 = $2,900, and then...

Suppose today you are considering whether to buy Stock Theta, and you want to do some basic analysis before buying the shares. By reading the firm's most recent Balance Sheet, you find the following...

United Airlines Holdings discloses two accounts on its financial statements entitled "Advanced ticket sales" and "Frequent flyer deferred revenue" with 2019 balances of $4.8 billion and $2.4 billion,...

After completing a scenario analysis for a prospective investment, the CFO of a company reported to the CEO that there is a 60 percent chance the investment will provide the firm with a net present...

Peter Hennings, manager of the Cosmetics Division, had asked Laura Gibson, divisional controller and CMA, to meet with him regarding a recent analysis of a capital budgeting proposal. Peter was...

16.9. Suppose you are hired as a consultant for Tailways, Inc., just after a recapitalization that increased the firms debt-to-assets ratio to 80 percent. The firm has the opportunity to take on a...

Please help solve problem 21-37 in chapter 21. What is the working capital of , 12/31/x1 ? and please help solve problem 21-38 ? thank you 21 Chapter Twenty-One Analyzing Financial Statements After...

Knowledge Check 01 Consider the following information: Accounts receivable Merchandise inventory Net sales Cost of goods sold Year 2 $ 88,000 66,000 408,000 248,000 Year 1 $ 80,000 80,000 380,000...

The need for ongoing change within the US healthcare system is warranted. However, before implementing change, advanced notice is given and explicit instructions on how the change will happen should...

People who want to raise kids should have to get a parenting license first. Parenting is a lot like piloting an airplane. In both cases, people's lives are in your hands: you could seriously injure...

From a collection of 7 different numbers and 8 different letters, 7- place license plates can be designed in such a way that the first 4 places are numbers and the next 3 places are letters....

Answer these questions about IP address space: (a) What is the theoretical maximum address space for a 32-bit address, such as that used by IPv4? (Ignore the fact that some addresses aren't usable or...

1. Jeff makes a contract with Acme Farms to buy 1000 apples for $200, which is the average price for apples at that time. The contract specifies that Jeff must have the apples by April 2 so that he...

On October 1, 2025, Teal Mountain Nail Bar Company establishes a petty cash fund by issuing a check for $270 to Dorothy Taylor, the custodian of the petty cash fund. On October 31,2025, Dorothy...

The Ranch 888 Noodle Company sells two types of dried noodles:ramen, at $6.50 per box, and chow fun, at $7.70 per box. So farthis year, the company has sold a total of 110,096 boxes ofnoodles,...

If the market places the same value on $1 of dividends as on $1 of capital gains, then firms with different payout ratios will appeal to different clienteles of investors. One clientele is as good as...

Suppose it is your task to evaluate two different investments in new subsidiaries for your company, one in your own country and the other in a foreign country. You calculate the cash flows of both...

Bruce & Co. expects its EBIT to be $185,000 every year forever. The firm can borrow at 9 percent. Bruce currently has no debt, and its cost of equity is 16 percent. If the tax rate is 35 percent,...

Cramer AG sells idle machinery to Enyart SE on July 1, 2019, for 40,000. Cramer agrees to repurchase this equipment from Enyart on June 30, 2020, for a price of 42,400 (an imputed interest rate of...

In September 2019, Gaertner Corp. commits to selling 150 of its iPhone-compatible docking stations to Better Buy Co. for $15,000 ($100 per product). The stations are delivered to Better Buy over the...

On May 3, 2019, Eisler Company consigned 80 freezers, costing $500 each, to Remmers Company. The cost of shipping the freezers amounted to $840 and was paid by Eisler Company. On December 30, 2019, a...