A company has earnings per share of $2 and it has 2 million shares outstanding.

Question

A company has earnings per share of $2 and it has 2 million shares outstanding. The company is going to undertake a project which will require investment of 1million now, and another 1.1 million a year from today. THe project will start to provide cash inflows from the end of year 2. THe cash inflow will be $600.000 forever. The required rate of return is 10%. What is the sare price of the stock today? (Hint: use an NPVGO approach) Excel is not allowed.

(THe answer is 21.73. Need to know how it's calculated)

Explanation / Answer

PVGO=-1-1.1/1.1+0.6/1.1^2+0.6/1.1^3.........

=-1-1.1/1.1+0.6/1.1^2/(1-1/1.1)

=-1-1.1/1.1+0.6/(1.1*0.1)

=$3.4545 million

So, PVGO per share=PVGO/Shares outstanding=3.4545/2=$1.72725

Share price today=EPS/required return+PVGO=2/0.1+1.72725=$21.72725

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