PVGO (present value of growth opportunities) is used to calculate the value of a company by taking into account its current assets and future earnings potential. It is calculated by subtracting the present value of a company's current assets from its total market value.
To calculate PVGO, follow these steps:
Calculate the company's current assets. This includes tangible assets (such as property, plant, and equipment) and intangible assets (such as patents and trademarks).
Determine the company's expected earnings growth rate. This can be done by analyzing the company's historical growth rate and market expectations.
Calculate the company's future expected earnings. This can be done by multiplying the company's current earnings by the expected growth rate.
Calculate the present value of the expected earnings using a discounted cash flow model. This involves estimating the company's future cash flows and discounting them back to the present using a discount rate that reflects the cost of capital.
Subtract the present value of the company's current assets from its total market value. This will give you the PVGO.
It is important to note that calculating PVGO can be complex and may involve making assumptions about future earnings, growth rates, and discount rates. As such, it should be used as a tool for valuation alongside other methods and should be accompanied by careful analysis and due diligence.
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