Question

The Stambaugh Corporation currently has earnings per share of $9.40. The company has no growth and pays out all earnings as dividends. It has a new project that will require an investment of $1.95 per share in one year. The project is only a two-year project, and it will increase earnings in the two years following the investment by $2.75 and $3.05, respectively. Investors require a return of 12 percent on Stambaugh stock.
a. What is the value per share of the company’s stock assuming the firm does not undertake the investment opportunity?
b. If the company does undertake the investment, what is the value per share now?
c. Again, assume the company undertakes the investment. What will the price per share be four years from today?



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  • CreatedAugust 28, 2014
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