Boston Chicken, Inc. has reported earnings of $8million. It is expected that earnings will grow at 3%
Question:
Boston Chicken, Inc. has reported earnings of $8million. It is expected that earnings will grow at 3% each year in perpetuity if the firm undertakes no new investment opportunities. There are two million shares of common stock outstanding. The firm has a new project that needs an immediate investment of $3 million. The new project will produce annual earnings of $1.5 million in the subsequent 20 years. Stockholders of the firm require 12 percent return on the stock.
a) What is the price of the stock if the firm does not undertake the new project?
b) Is it worthwhile to undertake the new project?
c)What is the price of the stock if the firm does undertake the new project?
Modern Advanced Accounting In Canada
ISBN: 9781259066481
7th Edition
Authors: Hilton Murray, Herauf Darrell