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GrandPreex Inc. is an all‐stock corporation that manufactures consumer goods. Sales are expected to be $500...

GrandPreex Inc. is an all‐stock corporation that manufactures consumer goods. Sales are expected to be $500 million over the course of this year (realized at the end of this year), and are projected to grow at 10% annual rate over the following two years. After that point, sales will stabilize. Management estimates that cash costs will be 60% of revenue in each year. To achieve these sales projections, total investment in plant and equipment will have to be $40 million this year (again, paid out at year end), $45 million next year, and will level off at $50 million thereafter. Depreciation charges are expected to match investment outlays in each of these years. GrandPreex is in the 34% tax bracket. The required return on GrandPreex’s assets is 16% [This is r0]. The firm has 10 million shares outstanding, currently trading at $65 per share. There are no costs of financial distress.

Would you say that GrandPreex’s shares are fairly priced?

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