Consider a firm with existing assets that generate an EPS of $5. If the firm doe

Question

Consider a firm with existing assets that generate an EPS of $5. If the firm does

not invest except to maintain existing asset, EPS is expected to remain constant at

$5 a year. However starting next year the firm has a

chance to invest $3 per share

a year in developing a newly discovered geothermal steam source for electricity

generation. Each investment is expected to generate a permanent 20% return

and discount rate is 12%. However, the source will be fully developed

by the fifth

year. What will the stock price at time 0? Solve the problem using standard

valuation method, i.e. stock price equals the present value of discounted future

dividend

stream

. Set the problem up on spreadsheet

Explanation / Answer

Here, by using excel spread sheet we can calculate the Stock price at 0 time. Inset PV in formula bar and take the values as,                                                                Rate : 12%                                                                Nper : 5                                                                PMT : -5                                                                FV : 3.    By enter we can get the value as $16.32. Therefore this PV is nothing but the stock price at 0 time                      

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