Calculate the present value of growth opportunities

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Reference no: EM132019608

Suppose that the stock of Kandi Technologies is currently trading at $10 per share. Earnings per share in the coming year are expected to be $2. The company has a policy of paying out 50% of its earnings each year in dividends.

The rest is retained and invested in projects that earn a 20% rate of return per year (ROE = 0.20).

Using the constant-growth DDM calculate the required rate of return of an investor in Kandi Technologies who purchases the stock at $10.

Calculate the Present Value of Growth Opportunities (PVGO). You may assume that the current trading price of the stock of $10 reflects its intrinsic value.

What would happen to the stock price of Kandi Technologies if the company cut the dividend payout ratio is cut to 0.25?

Assume the required return on equity is the same as the answer you calculated in Part (a).

Reference no: EM132019608

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