The annual earnings of avalanche skis inc can be 4 per

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The annual earnings of Avalanche Skis Inc can be $4 per share in perpetuity if the firm makes no new investments. Under such a situation, the firm would pay out all of its earnings as dividends. Suppose the first dividend will be received exactly one year from today. Alternately, suppose that in 3 years from now, and every subsequent year in perpetuity, the company can invest 25 percent of its earnings in new projects. Each project will earn 40 percent in perpetuity. The required interest rate of the firm is 14 percent. (more precisely, suppose the investment is made at the beginning of each year, with the first cash flow from every project commencing at the end of the year)

Reference no: EM13370874

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