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Essay / Research Paper Abstract
This 8 page paper answers 4 financing questions set by the student. The first looks at what is meant by Present Value of Growth Opportunities (PVGO) and how it aid with investment assessment. The second part of the paper outlines trade off theory and who it might help to determine the best capital structure of a company. The last two questions use net present value (NPV) calculations to assess costs of a project and potential returns. The bibliography cites 3 sources.
Page Count:
8 pages (~225 words per page)
File: TS14_TEpvgo01.rtf
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Unformatted sample text from the term paper:
valuing a firm it is important to look at the assets of the firm as well as the future revenue it will create, which can be measured with the Net
Present Value (NPV)1. There is only a potential for growth if the future projects of a firm have a positive NPV. Therefore, it is important to look at the growth
potential of a firm in order to assess its value. If there are no future growth projects in place, of they have a NPV of zero then the value of
the shares for that company will be the normalised earnings divided by the cost of equity (Wal, 2007). The traditional way of approaching PVGO is to start with a no
growth company and use this to compare with the value of firm that have non zero NPV growth opportunities. The application of this is the ability to use a measure
that is useful when making investment decision, with the argument that PVGO is superior to the price earnings multiples. It is an improvement over P/E as there is an allowance
for risk and the franchise factor (Wal, 2007). Firms with valuable PVOG may trade at low P/E levels due to the impact of time. A high growth potential
may be seen in firms that are currently performing badly, or may have a low level of assets, resulting in a lower P/E value based on traditional methods of share
price valuation. Question 3 In any aspect of life there will be trade offs, trading one thing for another. Trade-off theory in finance when looking at capital structure looks
at the balance of costs and advantages associated with different balances of debt and equity as a capital structure for a company. Unlike some other theories this is one which
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