The management of Southern Express Corporation is considering investing 10% of all future earnings in growth. The

Question:

The management of Southern Express Corporation is considering investing 10% of all future earnings in growth. The company has a single growth opportunity that it can take either now or in one period. Although the managers do not know the return on investment with certainty, they know it is equally likely to be either 10% or 14% per year. In one period, they will find out which state will occur. Currently the firm pays out all earnings as a dividend of $10 million; if it does not make the investment, dividends are expected to remain at this level forever. If Southern Express undertakes the investment, the new dividend will reflect the realized return on investment and will grow at the realized rate forever. Assuming the opportunity cost of capital is 10.1%, what is the value of the company just before the current dividend is paid (the cum-dividend value)?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...