 # Present Value of Growth Opportunities (PVGO)

Valuing growth independently

## What is Present Value of Growth Opportunities?

Present Value of Growth Opportunities (PVGO) is a concept that gives analysts a different approach to equity valuation. Considering that valuation in stock markets is a combination of fundamentals and expectations, we can break down the value of a stock to the sum of (1) its value assuming no earnings reinvested and (2) the present value of growth opportunities. ### PVGO formula

We can write it down in the following form:

Value of stock = value no growth + present value of GO

Or we can restate as:

PVGO = Value of stock – value no growth

and

PVGO = Value of stock – (earnings / cost of equity)

This approach uses the assumption that companies should distribute earnings among shareholders if no better use for it can be found, such as investing in positive Net Present Value (NPV) projects.

We can call the scenario in which a company has no positive NPV projects as a no-growth scenario, and formulate the following:

Value no growth = div / (required return on equity – growth)

where dividends represent 100% of earnings, making div = earnings for this assumption, and growth = 0.

Therefore, we can rewrite the formula as:

Value no growth = earnings / required return on equity

### Example calculations of PVGO

Think of a company with a required return of 12.5%, a \$57.14 market price, and expected earnings of \$5 per share.

So, \$57.1 = \$5 / 12.5% + PVGO

or PVGO = \$57.14 – (\$5 / 12.5%)

= \$17.14

Therefore, we can say that \$17.14 of the total \$57.14 (30%) comes from expectations on opportunities or options available to the company to grow, invest, or even its flexibility to adapt (modify, abandon, adjust scale) investments to new circumstances. We can more easily see these differences in the following table:

We can more easily see these differences in the following table:

rE1PriceE1/rPVGOPVGO/Price