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What is the price if the new investment is made

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The annual earnings of BouncingBall Tennis will be $5 a share in perpetuity if the firm makes no new investments. BouncingBall has a one-time opportunity, occurring three years from now, to invest 25% of its earnings (at that time) into a new project. For each dollar invested, earnings grow by $0.40 in the subsequent year and then remain at this new level in perpetuity. Assume the firm's discount rate is 14%.

(a) What is the price per share of BouncingBall Tennis stock today, without making the new investment?

(b) What is the price if the new investment is made?

Reference no: EM132169173

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