{"id":17746,"date":"2021-07-15T08:28:22","date_gmt":"2021-07-15T08:28:22","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=17746"},"modified":"2026-04-03T12:52:31","modified_gmt":"2026-04-03T12:52:31","slug":"the-present-value-of-growth-opportunities","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/the-present-value-of-growth-opportunities\/","title":{"rendered":"The Present Value of Growth Opportunities (PVGO)"},"content":{"rendered":"<p><script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"Suppose a company\u2019s earnings per share is expected to be $1.50. If its required rate of return is 12% and its share market price is $36, its PVGO is closest to:\",\r\n    \"text\": \"A company has expected earnings per share of $1.50, a required rate of return of 12%, and a current market price of $36. What is the present value of growth opportunities (PVGO)?\",\r\n    \"answerCount\": 1,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"$23.\",\r\n      \"commentary\": \"The value of a stock can be expressed as the value of a no-growth firm plus the present value of growth opportunities (PVGO). The no-growth value is EPS divided by the required return: 1.50 \/ 0.12 = 12.50. Subtracting this from the market price gives PVGO = 36 \u2212 12.50 \u2248 23.\"\r\n    }\r\n  }\r\n}\r\n<\/script><\/p>\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/fiJA5WhgigU\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n<p>The value of a stock can be evaluated as the sum of:<\/p>\r\n<ol style=\"list-style-type: lower-roman;\">\r\n\t<li>The value of the company without earnings reinvestment, \\((\\text{E}_{1}\/\\text{r})\\); plus<\/li>\r\n\t<li>The present value of growth opportunities (PVGO).<\/li>\r\n<\/ol>\r\n<p>$$\\text{V}_0= \\frac{E_1}{\\text{r}}+\\text{PVGO}$$<\/p>\r\n<p>Where:<\/p>\r\n<p>\\(\\text{E}_{1}=\\) Expected earnings at time, \\(t = 1\\).<\/p>\r\n<p>\\(\\text{r} =\\) Required rate of return.<\/p>\r\n<p>The present value growth opportunities (PVGO) sums the present value of opportunities to reinvest future earnings profitably. Earnings growth may increase, remain unchanged, or reduce shareholder wealth depending on whether the growth results from earning returns above, equal to, or less than the opportunity cost of funds. The PVGO is determined by:<\/p>\r\n<ol style=\"list-style-type: lower-roman;\">\r\n\t<li>The company\u2019s options to invest, and<\/li>\r\n\t<li>The company\u2019s options to start, scale, or abandon future projects.<\/li>\r\n<\/ol>\r\n<p>Increases in shareholder wealth occur when reinvested earnings earn more than the opportunity cost of funds. Companies with no prospects for investing in positive NPV projects are referred to as no-growth companies. They should distribute their earnings to shareholders as dividends to redirect capital to more attractive areas.<\/p>\r\n<p>The present value of growth opportunities can be restated in terms of the P\/E ratio based on forecasted earnings:<\/p>\r\n<p>$$\\frac{V_o}{E_1}\\ \\text{or}\\ \\frac{P_0}{E_1}\\ \\text{or}\\ \\text{P\u2044E}= \\frac{1}{\\text{r}}+ \\frac{\\text{PVGO}}{\\text{E}_1}$$<\/p>\r\n<p>The first term, \\(\\frac{1}{\\text{r}}\\), is the value of the P\/E for a no-growth company. The second term, \\( \\frac{\\text{PVGO}}{\\text{E}_1}\\), is the component of the P\/E value that relates to growth opportunities.<\/p>\r\n<div style=\"text-align:center; margin: 25px 0;\">\r\n  <a href=\"https:\/\/analystprep.com\" target=\"_blank\" style=\"display:inline-flex; align-items:center; justify-content:center; padding:10px 18px; border:2px solid #1a73e8; border-radius:999px; color:#1a73e8; text-decoration:none; font-weight:500; background-color:#f5f9ff; white-space:nowrap;\">\r\n    Access our CFA free trial to master PVGO and growth opportunity valuation\r\n  <\/a>\r\n<\/div>\r\n<h4>Example: The Present Value of Growth Opportunities<\/h4>\r\n<p>XYZ Ltd shares sell for $60 on future earnings per share of $2.00. Suppose that the required return is 10%. The PVGO is <em>closest<\/em> to:<\/p>\r\n<p>$$\\begin{align*}\\text{V}_0&amp;=\\frac{\\text{E}_1}{\\text{r}}+\\text{PVGO}\\\\ \\\\60&amp;=\\frac{2}{0.01}+\\text{PVGO}\\\\ \\\\ \\text{PVGO}&amp;= \\$60-\\$20 = \\$40\\end{align*}$$<\/p>\r\n<p>The market assigns 66.67% of the price \\(\\bigg(\\frac{$40}{$60}\\bigg)\\) to future growth.<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Suppose a company\u2019s earnings per share is expected to be $1.50. If its required rate of return is 12% and its share market price is $36, its PVGO is <em>closest<\/em> to:<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>$12.<\/li>\r\n\t<li>$23.<\/li>\r\n\t<li>$36.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is B.<\/strong><\/p>\r\n<p>$$\\begin{align*}36&amp;= \\frac{1.50}{0.12}+\\text{PVGO}\\\\ \\\\4.32&amp;=1.50 +0.12(\\text{PVGO})\\\\ \\\\2.82&amp;= 0.12(\\text{PVGO})\\\\ \\\\ \\text{PVGO}&amp;=23\\end{align*}$$<\/p>\r\n<\/blockquote>\r\n<p>Reading 23: Discounted Dividend Valuation<\/p>\r\n<p><em>LOS 23 (f) C<\/em><em>alculate and interpret the present value of growth opportunities (PVGO) and the component of the leading price-to-earnings ratio (P\/E) related to PVGO.<\/em><\/p>\r\n<p>&nbsp;<\/p>\r\n\r\n<div style=\"text-align:center; margin: 40px 0;\">\r\n  <a href=\"https:\/\/analystprep.com\" target=\"_blank\" style=\"display:inline-flex; align-items:center; justify-content:center; padding:12px 20px; border-radius:999px; background-color:#1a73e8; color:#ffffff; text-decoration:none; font-weight:600;\">\r\n    Start Free Trial \u2192\r\n  <\/a>\r\n  \r\n<p style=\"font-size:15px; margin-top:12px; color:#555;\">\r\n    Learn how to balance risk and return using the mean-variance framework, efficient frontier, and portfolio optimization techniques tested in FRM exams.\r\n  <\/p>\r\n<\/div>","protected":false},"excerpt":{"rendered":"<p>The value of a stock can be evaluated as the sum of: The value of the company without earnings reinvestment, \\((\\text{E}_{1}\/\\text{r})\\); plus The present value of growth opportunities (PVGO). $$\\text{V}_0= \\frac{E_1}{\\text{r}}+\\text{PVGO}$$ Where: \\(\\text{E}_{1}=\\) Expected earnings at time, \\(t = 1\\)&#8230;.<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,401],"tags":[216,440,445],"class_list":["post-17746","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-equity-valuation","tag-cfa-level-2","tag-reading-27-discounted-dividend-valuation","tag-the-present-value-of-growth-opportunities","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Present Value of Growth Opportunities<\/title>\n<meta name=\"description\" content=\"Learn how PVGO is calculated and how it separates a stock\u2019s value into growth opportunities and existing earnings components.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, 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