Sonata Company has no investment opportunities. It expects to earn cash earnings per share of Rs 10 perpetually and distribute entire earnings as dividends to shareholders.(a) What is the value of the share if shareholders opportunity cost of capital is 15 per cent? (b) Suppose the company discovers an opportunity to expand its existing business. It estimates that it will need to invest 50 per cent of its earnings annually for ten years to produce 18 per cent return. Management does not foresee any growth after this ten-year period. What will be Sonatas share price if shareholders opportunity cost of capital is 15 per cent?

Answer rating: 100% (QA)

a To calculate the value of the share when the shareholders opportunity cost of capital is 15 percent and the company distributes all earnings as divi... View the full answer