Derek's company has existing assets that generate Earnings Per Share EPS of $5. If Derek does...

 

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Derek's company has existing assets that generate Earnings Per Share EPS of $5. If Derek does not invest except to maintain existing assets, EPS is expected to remain constant at $5 a year. However, starting next year, Derek an opportunity to invest $3 per share a year in developing a new technology. Each investment is expected to generate a 20% return (assume that this return is not compounded, so each year the return is 3 x.2). The technology will be fully developed by the end of the fith year. (a) What will be the stock price and PE ratio assuming that investors require a 12%? [Hint: use the dividend discount model] (b) Following your results in the previous question), the effect of a higher PE ratio after investing in the technology can only be explained by the low risk of 12% required by the investors. True/False. Explain using the concept of PVGO. Derek's company has existing assets that generate Earnings Per Share EPS of $5. If Derek does not invest except to maintain existing assets, EPS is expected to remain constant at $5 a year. However, starting next year, Derek an opportunity to invest $3 per share a year in developing a new technology. Each investment is expected to generate a 20% return (assume that this return is not compounded, so each year the return is 3 x.2). The technology will be fully developed by the end of the fith year. (a) What will be the stock price and PE ratio assuming that investors require a 12%? [Hint: use the dividend discount model] (b) Following your results in the previous question), the effect of a higher PE ratio after investing in the technology can only be explained by the low risk of 12% required by the investors. True/False. Explain using the concept of PVGO.

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a What will be the stock price and PE ratio assuming that investors require a 12 The stock price can be found using the dividend discount model DDM which is a valuation method that uses the present va... View the full answer