As shown in equation (6.10), the price equation for a firm with positive growth opportunities is where
Question:
As shown in equation (6.10), the price equation for a firm with positive growth opportunities is
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where P0 is the current stock price, X0 is current reported earnings per share, re is the cost of equity capital, and NPVGO is the net present value of future growth opportunities. Recent values of P0, X0, and re for several companies are:
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Required:
1. Why does eBay have a higher cost of equity capital (re) 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 less than Home Depot's?
5. Why is Walmart's NPVGO negative?
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...
Step by Step Answer:
Requirement 1 The cost of equity capital for eBay is higher than that of WalMart because eBay has a ...View the full answer
Financial Reporting and Analysis
ISBN: 978-1259722653
7th edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer
