Price and PVGO
Future dividends can come from not only existing projects running now (assets in place) but also new projects. Po=PV (future dividends) =PV (future net cash flows from assets in place) +PV (inflows from new projects minus costs of new projects) The second term is called the Present Value of Growth Opportunities, or PVGO
Note
An alternative way to think of valuation of a growth company is to think of two kinds of projects: the projects that are currently being undertaken (assets in place) and the projects that will be undertaken in the future. The latter is the present value of growth opportunities (PVGO). Price = no growth earnings per share + PVGO
Suppose the only way for a company to increase earnings is to grow its assets Suppose the only way a company can grow its assets is to reinvest Could also raise money, but then some part of money goes to other claimants (new shareholders) Not reinvesting means it pays out all earnings If b=0, Difference between this and the actual price is P