Carrington Corporations has no growth and pays out all earnings as dividends. It expects to earn $30
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Question:
Carrington Corporations has no growth and pays out all earnings as dividends. It expects to earn $30 million per year in perpetuity. An opportunity arises that requires $12 million investment now. If the rm decides to take up this investment, it will increase earnings of $8 million in perpetuity, beginning three years from today because the investment takes three years to generate earnings. The rm has 20 million shares of common stock outstanding, and the required rate of return on the stock is 10 percent. Ignore any taxes.
a) What is the price of a share of stock if the rm does not undertake the new investment?
b) What is the value of the investment?
c) What is the per share stock price if the rm undertakes the investment?
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