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The annual earnings of Aley Ltd will be $6 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. Assume the first dividend will be sent to stockholders exactly one year from now. Alternatively, assume that three years from now, and in every subsequent year in perpetuity, the company can invest 25% of its earnings in new projects. Each project will earn 20% at year-end in perpetuity. The firm's discount rate is 12%.
(a) What is the price per share of Aley Ltd's stock today? Without the company making the new investment?
(b) What is the value of the investment stream?
(c) What is the per-share stock price if the firm undertakes the investment stream?
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