How do you calculate present value of growth opportunities?

PVGO is calculated as follows: PVGO = share price – earnings per share ÷ cost of capital.

How do you calculate NPV growth rate?

NPV = F / [ (1 + r)^n ] where, PV = Present Value, F = Future payment (cash flow), r = Discount rate, n = the number of periods in the future of its future cash flows at a point in time beyond the forecast period.

What is expanded NPV?

Expanded Net present value factors the Value of Real options into the valuation of an Investment. It is equal to the Net present value of an Investment plus the Value of Real options.

What does a high PVGO mean?

PVGO can also be expressed as a proportion of PVGO to total value V0. A higher percentage of PVGO to V0 means that more of the company’s present value results from expectation of growth in the company’s earnings.

How do you calculate NPV per share?

From a mathematical perspective, it’s quite clear that a stock price is equal to the NPV of all future dividends. For instance, the stock price today is equal to the NPV of the dividends during the first year, plus the discounted value of the stock in a year’s time. In other words, P(0) = PV (Div 1) + P(1).

What are the components of an expanded NPV?

The calculation of NPV encompasses many financial topics in one formula: cash flows, the time value of money, the discount rate over the duration of the project (usually WACC), terminal value, and salvage value.

What are the components of an expanded NPV of a platform acquisition?

Expanded NPV = Standalone Value + Value of Synergistic Follow-on Opportunities – Price The standalone value can be calculated using a DCF calculation, the value of synergistic follow-on opportunities can be estimated using real options, and in a competitive bidding situation game theory can help in determining the …

What does a low PVGO mean?

If PVGO is negative, then the company may still grow, but its overall ROE will decline, and with it, its stock price. Therefore, the company should distribute most of its earnings as dividends, since that will yield the greatest return for stockholders.

What does net present value of growth opportunities mean?

Net Present Value of Growth Opportunities (NPVGO) is the simply the present value of additional cash flows associated with an acquisition, net of the purchase price of the acquisition. Essentially, the concept adds the present value of assets in place to the present value of the company’s growth prospects.

Why are cash flows discounted in net present value?

The cash flows in net present value analysis are discounted for two main reasons, (1) to adjust for the risk of an investment opportunity, and (2) to account for the time value of money (TVM). The first point (to adjust for risk) is necessary because not all businesses, projects, or investment opportunities have the same level of risk.

Which is the best definition of net present value?

Net Present Value (NPV) is the value of all future cash flows (positive and negative) over the entire life of an investment discounted to the present. NPV analysis is a form of intrinsic valuation and is used extensively across finance

How to calculate intrinsic value of growth opportunities?

If the expected earnings per share from future growth opportunities is $.90, and the growth rate (g) is 8%, then the value of those earnings is $0.90/ (.12 – .08) = $22.50. The intrinsic value per share of the company is the value per share due to current earnings and the value due to future growth opportunities: $41.67 + $22.50 = $64.17.