CFA Practice Question

There are 96 practice questions for this study session.

CFA Practice Question

The market price of SNI shares is $64. Its 2011 earnings per share were $10.5 and 2012 earnings per share are expected to be $12.5. The required rate of return is 10%. The present value of growth opportunities of this company is
A. -64
B. -61
C. 61
Explanation: We calculate PVGO as: PVGO = P - E1/r = 64 - 12.5/0.1 = -61.

User Contributed Comments 7

User Comment
brandsat use next year's earnings, not current year's earnings.
mishis I don't understand when to use current earnings and when to use expected earnings???
malawyer The future expected earnings contain the component of growth opportunity and should be included in PVGO.
mhtwo According to the book, V_0 = E_1/r + PVGO.
Paulvw Reading 38, Page 190 of this year's notes states that the PVGO is the difference between intrinsic value and the no-growth value per share: P0 - E1/r, where P0 is today's price, and E1 is next year's earnings.
lauolivia Look at the curriculum, that's the formula and that's what seems logical to me. For a PV to make sense, the CF that is discounted has to occur in the future, otherwise discounting is pointless...
darbyland per question, you will be expected to use current earnings if the question explicitly states the company is giving out all earnings as dividend or it is at "no growth" stage
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