Without the company making the new investment

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Practice Problem (not required for PS 4, not extra credit) A) The annual earnings of Pinecrest Skis, Inc. will be $7 per share in perpetuity if the firm makes no new investments. Under such a situation, the firm would pay out all of its earnings as dividends. Assume the first dividend will be received exactly one year from now. B) Alternately, assume that three years from now, and in every subsequent year in perpetuity, the company can invest 40 percent of its earnings in new projects. Each project will earn 20 percent at year-end in perpetuity. C) In either case, the firm’s discount rate is 10 percent.

a. What is the price per share of PSI stock today without the company making the new investment?

b. If PSI announces that the new investment will be made, what will the per-share stock price be today?

Reference no: EM131991409

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