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The annual earnings of Avalanche Skis will be 6 Swedish kroner 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.
Alternatively, assume that, three years from now, and in every subsequent year
in perpetuity, the company can invest 25 per cent of its earnings in new projects.
Each project wil earn 40 per cent at year end perpetuity. The firm’s discount
rate is 14 per cent.
(a) What is the share price of Avalanche Skis today without the company making
the new investment?
(b) If Avalanche announces that the new investment will be made, what will the
share price be today?I have pulled the question from a corporate finance textbook, I tried the question and completed the first part, the second part of the question im a bit confused, my question is can I use this formulae Market Value = D0 (1 + g )/(re ? g) where g is 0.25*0.40
Sorry it would not be very professional of me to answer this question but I will say the formula you mentioned, Market Value = D0 (1 + g) / (re – g), is indeed applicable for calculating the market value of a share when considering growth in dividends.
would you recommend what video to watch on financial management to answer this question, does this question topic get covered in financial management.
And my last question, im studying corporate finance at university do you believe that the financial management open tuition module aligns best with it
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