How this calculator works
The value of a share can be split into two parts. The first is the value of keeping the current earnings forever, which is the earnings per share divided by the cost of equity, as if the company paid everything out and never grew. The rest of the price is the present value of growth opportunities: what investors are willing to pay for projects that earn above the cost of equity. A price below the no-growth value gives a negative PVGO, meaning the market expects the company to destroy value or that the cost of equity used is too low. The model assumes a constant cost of equity and a constant payout, so it is a diagnostic, not a full valuation.
Formula
No-growth value per share = EPS / r. PVGO per share = share price - EPS / r, so share price = EPS / r + PVGO. Rearranged, EPS = (price - PVGO) x r and r = EPS / (price - PVGO). EPS equals total earnings divided by shares outstanding.
Worked example
A company earns $5,000,000 across 2,000,000 shares, so EPS is $2.50. At a 10% cost of equity the current earnings are worth $2.50 / 0.10 = $25. If the share trades at $50, investors pay $25 for growth, so PVGO is $25 per share. A share at $40 with EPS of $2 and an 8% cost of equity has a no-growth value of $25 and a PVGO of $15.
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Frequently asked questions
What does a negative PVGO mean?
The market values the company at less than its current earnings are worth. That can happen when growth projects are expected to earn below the cost of equity, when the company is in decline, or when the cost of equity used is higher than the market is applying.
Is PVGO the same as the terminal value?
No. The terminal value in a discounted cash flow model captures all cash flows after the forecast horizon, including growth. PVGO isolates the part of the price above the no-growth value of current earnings.
Why does the cost of equity matter so much?
It is the discount rate on perpetuity earnings. A change of one percentage point moves the no-growth value substantially, especially at low rates, and the PVGO absorbs all of that change because the price is fixed.