Consider a firm with existing assets that generate EPS of $5. The firm cannot raise any...

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Consider a firm with existing assets that generate EPS of $5. The firm cannot raise any external capital and hence, if the firm acts as a cash cow while maintaining existing assets, then EPS is expected to remain constant at $5 a year. The firm expects to have an investment opportunity starting in year 6. The opportunity implies investing 50% of earnings per year in a new project. The firm anticipates having this opportunity forever. Each investment is expected to generate a permanent 15% return. The required rate of return for similar risk projects is 10%. a. Calculate the stock price if the firm takes advantage of the investment opportunity Consider a firm with existing assets that generate EPS of $5. The firm cannot raise any external capital and hence, if the firm acts as a cash cow while maintaining existing assets, then EPS is expected to remain constant at $5 a year. The firm expects to have an investment opportunity starting in year 6. The opportunity implies investing 50% of earnings per year in a new project. The firm anticipates having this opportunity forever. Each investment is expected to generate a permanent 15% return. The required rate of return for similar risk projects is 10%. a. Calculate the stock price if the firm takes advantage of the investment opportunity

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