California Real Estate, Inc., expects to earn $72.8 million per year in perpetui

Question

California Real Estate, Inc., expects to earn $72.8 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity to invest $17.8 million today and $6.8 million in one year in real estate. The new investment will generate annual earnings of $12.8 million in perpetuity, beginning two years from today. The firm has 16.8 million shares of common stock outstanding, and the required rate of return on the stock is 16 percent. Land investments are not depreciable. Ignore taxes. a. What is the price of a share of stock if the firm does not undertake the new investment? (Do not round intermediate calculation and round your final answer to 2 decimal places. (e.g., 32.16))

question 1

Share price

question 2

b. What is the value of the investment? (Enter your answer in dollars, not millions of dollars.Do not round intermediate calculation and round your final answer to 2 decimal places. (e.g., 32.16)) Value of the investment

question 3

c. What is the per-share stock price if the firm undertakes the investment? (Do not round intermediate calculation and round your final answer to 2 decimal places. (e.g., 32.16)) Share price $

Explanation / Answer

Sl No Details Amount Amount Ans a Future Earnings for perpetuity         72.80 Required rate of return 16.00% Value of the Firm 72.8/.16      455.00 No of Shares         16.80 Price of the Share         27.08 Ans b Investment in Year 0 -17.8 Investment in Year 1 Real Estate -6.8 Present Value of investment in Real Estate -6.8*0.8621 -5.86228 Cost Of Intilal Investment -23.66228 Annual Earnings 12.8 Present value of earnings in Perpetuity 12.8/16% 80 Value of the investment In Mn 56.33772     563,37,720.00 Ans c No of Shares required to fund the expansion 24.6*10^6 908419 Revised No of Shares           177,08,419 Revised Value of the Firm   455000000+56337720 5113,37,720.00 Price of the Share                      28.88

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