Question: The annual earnings of Avalanche Skis Inc will be 10

The annual earnings of Avalanche Skis Inc. will be $10 per share in perpetuity if the firm makes no new investments. Under such a situation, the firm would pay out all of its earnings as dividends. Assume the first dividend will be received exactly one year from now. Alternatively, assume that three years from now, and in every subsequent year in perpetuity, the company can invest 25 percent of its earnings in new projects. Each project will earn 15 percent at year-end in perpetuity. The firm’s discount rate is 13 percent.
a. What is the price per share of Avalanche Skis Inc. stock today without the company making the new investment?
b. If Avalanche announces that the new investment will be made, what will the per- share stock price be today?

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  • CreatedJune 17, 2015
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