As shown in equation (6.9), the price equation for a firm with positive growth opportunities is where
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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:
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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?
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...
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Requirement 1 The cost of equity capital for eBay is higher than that of WalMart because eBay has a ...View the full answer
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