The Crash, Inc. has an ROE of 12%, a payout ratio of 60%, earnings next year of $8 per share, a required return of 18%, and a current price of $36.36 Find the Present Value of Growth Opportunities for Crash.

4.8%

Explanation:

Payout ratio determined the ratio of earning which is paid to the stockholder as dividend.

Payout ratio = Dividend / Earning

0.6 = Dividend / $8

Dividend = $8 x 0.6

Dividend = $4.8

Dividend Valuation method is used to value the stock price of a company based on the dividend paid, its growth rate and rate of return. The price is calculated by calculating present value of future dividend payment.

As we have the value of the bond, we need to calculate the growth rate of dividend using following formula.

Value of Share = Dividend / (Rate of return - Growth rate)

$36.36 = $4.8 / (18% - g)

0.18 - g = $4.8 / $36.36

0.18 - g = 0.132

g = 0.18 - 0.132

g = 0.048

g = 4.8%