Developing the premier cigarette

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Reference no: EM131518804

RJR has spent $325 million on developing the ‘Premier’ cigarette. If RJR was to have the same profit margin on this line as the other brands ($8.52 per 1,000) cigarettes and the required rate of return is 11%, determine:

a) If RJR sells the same number of Premiers every year for the next twenty years, how many must be sold each year for this to be a zero-NPV project.

b) Now consider that the production of Premier will require a $50 million start-up cost. How does that affect the NPV? Are these numbers reasonable? Would you continue or scrap the Premier project?

c) If RJR paid out all of the earnings in dividends and earnings continued to increase at 9.6 % per year, how should the stock be priced, given an 11% required rate of return?

d) During the battle for RJR Nabisco, the stock price began at $56, was bid up to $85, $90, $100 and finally $109 per share in the span of six weeks. How can the company be valued so differently in such a short period of time?

Reference no: EM131518804

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