corporate finance Corporate finance is an area of finance that deals with the sources of funding, and the capital structure of businesses, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and analy ...

, Alex Stomper (N.D.
Finance Theory I

MIT OpenCourseWare MIT OpenCourseWare (MIT OCW) is an initiative of the Massachusetts Institute of Technology (MIT) to publish all of the educational materials from its undergraduate- and graduate-level courses online, freely and openly available to anyone, anywh ...

the present value of growth opportunities (PVGO) is a valuation measure applied to growth stocks. It represents the component of the company's stock value that corresponds to (expected) growth in earnings. It thus allows an analyst to assess the extent to which the share price represents the current business, and to what extent it reflects assumptions about the future. PVGO can then also be used in

relative valuation Relative valuation also called valuation using multiples is the notion of comparing the price of an asset to the market value of similar assets. In the field of securities investment, the idea has led to important practical tools, which could presu ...

, i.e. when comparing between two investments (see similar re

PEG ratio The 'PEG ratio' ( price/earnings to growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth. In general, the P/E ratio is ...

). PVGO is calculated as follows: : This formula arises by thinking of the value of a company as inhering two components: (i) the present value of existing earnings, i.e. the company continuing as if under a "no-growth policy"; and (ii) the present value of the company's growth opportunities. PVGO can then simply be calculated as the difference between the

stock price A share price is the price of a single share of a number of saleable equity shares of a company. In layman's terms, the stock price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for. B ...

and the present value of its zero-growth-earnings; the latter, the second term in the formula above, uses the calculation for a

perpetuity In finance, a perpetuity is an annuity that has no end, or a stream of cash payments that continues forever. There are few actual perpetuities in existence. For example, the United Kingdom (UK) government issued them in the past; these were kno ...

(see ).

References

Corporate finance Valuation (finance) Fundamental analysis {{finance-stub