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
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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