California Real Estate, Inc., expects to earn $71.7 million per year in perpetui
ID: 2773034 • Letter: C
Question
California Real Estate, Inc., expects to earn $71.7 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity to invest $16.7 million today and $5.7 million in one year in real estate. The new investment will generate annual earnings of $11.7 million in perpetuity, beginning two years from today. The firm has 15.7 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.
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))
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))
California Real Estate, Inc., expects to earn $71.7 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity to invest $16.7 million today and $5.7 million in one year in real estate. The new investment will generate annual earnings of $11.7 million in perpetuity, beginning two years from today. The firm has 15.7 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.
Explanation / Answer
Answer:aCalculation of the price of a share of stock if the firm does not undertake the new investment:
No growth /cash cow value = $71.7 million / .16
= $448.125 million
MM Stock price = $448.125 million / 15.7 = $28.54 per share
Answer:b Cost = -16.7 million – 5.7 million / (1.16) = -21.61 million
PV of perpetuity = 11.7 million / .16 = 73.125 million;
TV = 73.125/ (1.16) = 63.04 million
NPV =-21.61 million + 63.04 million = 41.43 million
Answer:c Price = 41.43 million / 15.7 = $2.64 per share
Price = $28.54 + $2.64 = $31.18 per share
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.