Company stock without making the new investment

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Reference no: EM131178345

Company A today expects to earn $6.25 per share for each of the future operating periods (beginning at time 1) if the firm makes no new investments and returns the earnings as dividends to the shareholders. However, the CEO of this company has discovered an opportunity to retain and invest 20% of the earnings beginning three years from today. This opportunity will continue for each period indefinitely. He expects to earn 11% on this new equity investment, the return beginning one year after each investment is made. The firm's equity discount rate is 13%. Please show your calculations.

a. What is the price per share of this company stock without making the new investment?

b. If the new investment is expected to be made, based on the above information, what would the price of the stock be now?

c. Suppose the company could increase the investment in the project. What would the retention ratio need to be to make this project attractive?

Reference no: EM131178345

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