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.

 

Answer rating: 100% (QA)

NPVGO can be used ... View the full answer