Question

Bruin Inc. will have earnings of $15 million next year and is projected to grow at a constant rate of 6 percent forever. All earnings are paid out as dividends to shareholders.

The company plans to launch a new project two years from now that will cost $10 million. The project will increase the firm's annual earnings by a constant $8.3 million every year forever starting one year later (i.e. 3 years from now).

What is the market value of the company stock? The discount rate is 16.3 percent.

Select one:

a. $176 million

b. $30 million

c. $122 million

d. $187 million

e. $65 million

Answer #1

value of the current operations = 15/0.163 = 92.02 million

value of the new project:

16.3000% | ||

Cash flows | Year | Discounted CF |

- | 0 | 0.00 |

- | 1 | 0.00 |

(10.00) | 2 | -7.39 |

50.92 | 2 | 37.65 |

value of new project = 30.25 million

total value of company stock = 92.02 + 30.25 = 122 million

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