Starting at the terminal nodes, the valuation of growth opportunities (PVGO) works backwards in time to the top summing the state value creation and taking expectations over the future investment opportunity values.
The growth opportunities (PVGO) consist of sequential local expansion (in stage 1) and further geographical growth (in stage 2).
The growth opportunities (PVGO) of Airport A or Airport B consist of sequential local expansion (boxes) and further geographical growth (end node).
To estimate the present value of growth opportunities, PVGO, I sum the option value of the expansion subgames along the (subgame-perfect) equilibrium path.
The present value of the firm's growth opportunities (PVGO) is then defined as the intertemporal summation of VG(t,0):
The rationale for using EP as the proxy for growth opportunities is clear from the following expression for the market equilibrium price of a common stock: P = [EPS.sub.1]/r + PVGO, where P is the market equilibrium stock price, [EPS.sub.1] is the earning per share at time 1 generated from the assets already in place at time O, r is the capitalization rate, and PVGO is the present value growth opportunities.
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