Present Value of the Growth Opportunities of Crandon Corporation

Question

Over the next year, expected return on the S&P 500 index (proxy for the optimal risky portfolio), the SMB portfolio, and the HML portfolio are 11%, 6%, and 3%; standard deviation of the returns on the S&P 500 is 27%; risk free return is 2%.

Crandon Corporation’s current-year EPS is $2.86. The firm has a plowback ratio of 40% and the expected ROE is 12.5%. Crandon has a beta of 1.25. Assume that these are long-term, sustainable plowback rate and ROE and use the risk-free rate and expected market return given above as required.

What is the present value of the growth opportunities (PVGO) of Crandon?

Summary: This question belongs to financial management and discuses about Crandon Corporation’s stocks and to determine present value of the growth opportunities (PVGO) of Crandon.

Total word count: 20