Investors estimate that Slender Burger's (SB) existing business generates $2.5 million in annual earnings every year...

 

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Investors estimate that Slender Burger's (SB) existing business generates $2.5 million in annual earnings every year for the foreseeable future (i.e., forever). SB has 2 million shares outstanding and its required rate of return is 15% (EAR). a) What would be the value of a single SB share if the company will not make any new investments and will pay out all its future earnings in dividends (next dividend is paid in one year from today)? b) Now suppose SB has the following investment opportunities (note, the management of SB will implement all positive NPV projects and will reject any negative NPV projects): Projects US Expansion Asian Expansion Investment at 1-2 (in two years) $2 million $7 million Earnings generated per year $300,000 (forever, from t=3 to ∞) $1 million (for 20 years, from t = 3 to 22) Based on what you know about the above investment opportunities, how much would you be willing to pay for a share of SB today? Investors estimate that Slender Burger's (SB) existing business generates $2.5 million in annual earnings every year for the foreseeable future (i.e., forever). SB has 2 million shares outstanding and its required rate of return is 15% (EAR). a) What would be the value of a single SB share if the company will not make any new investments and will pay out all its future earnings in dividends (next dividend is paid in one year from today)? b) Now suppose SB has the following investment opportunities (note, the management of SB will implement all positive NPV projects and will reject any negative NPV projects): Projects US Expansion Asian Expansion Investment at 1-2 (in two years) $2 million $7 million Earnings generated per year $300,000 (forever, from t=3 to ∞) $1 million (for 20 years, from t = 3 to 22) Based on what you know about the above investment opportunities, how much would you be willing to pay for a share of SB today?

Answer rating: 100% (QA)

a Value of SB the Companyno new investments PV of the perpetuity of dividends ... View the full answer