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# 金融代写|公司金融学代写Corporate Finance代考|GROWTH OPPORTUNITIES

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## 金融代写|公司金融学代写Corporate Finance代考|GROWTH OPPORTUNITIES

We previously spoke of the growth rate of dividends. We now want to address the related concept of growth opportunities. Imagine a company with a level stream of earnings per share in perpetuity. The company pays all of these earnings out to stockholders as dividends. Hence,
$$\mathrm{EPS}=\mathrm{Div}$$
where EPS is earnings per share and Div is dividends per share. A company of this type is frequently called a cash cow.

From the perpetuity formula of the previous chapter, the value of a share of stock is:
Value of a Share of Stock when Firm Acts as a Cash Cow:
$$\frac{\text { EPS }}{r}=\frac{\text { Div }}{r}$$
where $r$ is the discount rate on the firm’s stock.

This policy of paying out all earnings as dividends may not be the optimal one. Many firms have growth opportunities, that is, opportunities to invest in profitable projects. Because these projects can represent a significant fraction of the firm’s value, it would be foolish to forgo them in order to pay out all earnings as dividends.

Although firms frequently think in terms of a set of growth opportunities, let’s focus on only one opportunity, that is, the opportunity to invest in a single project. Suppose the firm retains the entire dividend at date 1 in order to invest in a particular capital budgeting project. The net present value per share of the project as of date 0 is $N P V G O$, which stands for the net present value (per share) of the growth opportunity.

What is the price of a share of stock at date 0 if the firm decides to take on the project at date 1 ? Because the per share value of the project is added to the original stock price, the stock price must now be:
Stock Price after Firm Commits to New Project:
$$\frac{\text { EPS }}{r}+\text { NPVGO }$$
Thus, equation (5.10) indicates that the price of a share of stock can be viewed as the sum of two different items. The first term (EPS/r) is the value of the firm if it rested on its laurels, that is, if it simply distributed all earnings to the stockholders. The second term is the additional value if the firm retains earnings in order to fund new projects.

## 金融代写|公司金融学代写Corporate Finance代考|Dividends or Earnings: Which to Discount?

As mentioned earlier, this chapter applied the growing-perpetuity formula to the valuation of stocks. In our application, we discounted dividends, not earnings. This is sensible since investors select a stock for what they can get out of it. They only get two things out of a stock: dividends and the ultimate sales price, which is determined by what future investors expect to receive in dividends.

The calculated stock price would be too high were earnings to be discounted instead of dividends. As we saw in our estimation of a firm’s growth rate, only a portion of earnings goes to the stockholders as dividends. The remainder is retained to generate future dividends. In our model, retained earnings are equal to the firm’s investment. To discount earnings instead of dividends would be to ignore the investment that a firm must make today in order to generate future returns.
The No-Dividend Firm
Students frequently ask the following questions: If the dividend-discount model is correct, why aren’t no-dividend stocks selling at zero? This is a good question and gets at the goals of the firm. A firm with many growth opportunities is faced with a dilemma. The firm can pay out dividends now, or it can forgo dividends now so that it can make investments that will generate even greater dividends in the future. ${ }^{11}$ This is often a painful choice, because a strategy of dividend deferment may be optimal yet unpopular among certain stockholders.
Many firms choose to pay no dividends-and these firms sell at positive prices. ${ }^{12}$ Rational shareholders believe that they will either receive dividends at some point or they will receive something just as good. That is, the firm will be acquired in a merger, with the stockholders receiving either cash or shares of stock at that time.

Of course, the actual application of the dividend-discount model is difficult for firms of this type. Clearly, the model for constant growth of dividends does not apply. Though the differential growth model can work in theory, the difficulties of estimating the date of first dividend, the growth rate of dividends after that date, and the ultimate merger price make application of the model quite difficult in reality.

## 金融代写|公司金融学代写Corporate Finance代考|GROWTH OPPORTUNITIES

$$\mathrm{EPS}=\mathrm{Div}$$

$$\frac{\mathrm{EPS}}{r}=\frac{\text { Div }}{r}$$

$$\frac{\mathrm{EPS}}{r}+\mathrm{NPVGO}$$

## MATLAB代写

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