ABC Corp has invested in projects with ROE of 15% and expects an EPS of $ 5
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Question:
ABC Corp has invested in projects with ROE of 15% and expects an EPS of $ 5 next year.
The company maintains a 60% dividend ratio and the share price is currently $ 50.
The company is contemplating an expansion plan which will require an initial investment of $1,000,000. However, the plan is expected to generate a free cash flow of $ 90,000 in the first year which is then expected to grow at a constant rate of 4% per year forever.
The plan is to be funded entirely by shareholders.
Should the company go ahead with the expansion plan?
Explain all relevant calculations.
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
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