Question

company is expected to earn $2 million in perpetuity if it undertakes no new investment opportunities. There are 200,000 shares outstanding. The company’s discount rate is 10 percent. Suppose the firm pays all of the earnings as dividends, what would be the value of the company now? Suppose the company announces to the world that they plan to spend $2,000,000 million on date 1 and the expected increase in earnings is $200,000 per year in every subsequent period forever. What would be the new value per share once the company makes an announcement about the new project?

Answer 1

Step-by-step explanation:

The value of the firm will be the present value of all future dividends. Since this is a 0-growth stock and all of the earnings are paid out as dividend, we can calculate the firms value as follows:
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