Question

9. suppose that a company has earnings per share of $3 and it has 2 million shares outstanding. the company is going to undertake a project that will require an investment of $1 million now, and another $1.1 million 1 year from today. the project will start to provide cash inflows from the end of year 2. the cash inflow will be $600,000 at the end of year 2 and then it will grow at the rate of 4% per year. the required rate of return is 10%. what is the share price of the stock today? a. $30.00 b. $32.90 c. $33.68 d. $34.97

Answer 1

To determine the share price of the stock today, you need to calculate the present value of the future cash flows from the project and divide it by the number of shares outstanding.

Step-by-step explanation:

To determine the share price of the stock today, we need to calculate the present value of the future cash flows from the project and divide it by the number of shares outstanding.

First, let's calculate the present value of the cash inflows from the project:

1. The cash inflow at the end of year 2 is $600,000. We need to discount it back to present value using the required rate of return of 10%. The present value of $600,000 is $545,454.55.
2. The cash inflows will grow at a rate of 4% per year. So, at the end of year 3, the cash inflow will be $600,000 * (1 + 0.04) = $624,000. Discounting it back to present value gives us $535,454.55.
3. Similarly, at the end of year 4, the cash inflow will be $624,000 * (1 + 0.04) = $648,960. Discounting it back to present value gives us $525,413.22.

Next, let's calculate the total present value of these cash flows:

Total present value = $545,454.55 + $535,454.55 + $525,413.22 = $1,606,322.32.

Finally, let's calculate the share price:

Share price = Total present value / Number of shares = $1,606,322.32 / 2,000,000 = $0.803 per share.

The share price of the stock today is $0.803, or approximately $0.80.