The price of a company's share is ₹80 and the value of growth opportunities is ₹20. If the company's…
The market price of a share (P0) can be decomposed into the no-growth value of earnings per share (EPS / ke) plus the Present Value of Growth Opportunities (PVGO): P0 = (EPS…
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The price of a company's share is ₹80 and the value of growth opportunities is ₹20. If the company's capitalisation rate is 15%, how much is the EPS?
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Correct answer D
The market price of a share (P0) can be decomposed into the no-growth value of earnings per share (EPS / ke) plus the Present Value of Growth Opportunities (PVGO): P0 = (EPS / ke) + PVGO. Given P0 = Rs. 80, PVGO = Rs. 20, and capitalisation rate (ke) = 15% (0.15), we have 80 = (EPS / 0.15) + 20, which simplifies to EPS / 0.15 = 60, yielding EPS = 60 * 0.15 = Rs. 9.
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UGC NET Commerce