California Real Estate, Inc., expects to earn $71.1 million per year in perpetui

Question

California Real Estate, Inc., expects to earn $71.1 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity to invest $16.1 million today and $5.1 million in one year in real estate. The new investment will generate annual earnings of $11.1 million in perpetuity, beginning two years from today. The firm has 15.1 million shares of common stock outstanding, and the required rate of return on the stock is 12 percent. Land investments are not depreciable. Ignore taxes.

Explanation / Answer

What is the price of the stock if it is not taking any new investment?

a) The value of firm= Price in perpetuity/return on stock

=71.1/12%=$592.5mn

Price per stock=592.5/15.1=39.24

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.