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- October 24, 2024 at 11:05 am #712756
HI I need help with this question – The annual earnings of Avalanche Skis will be 7 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 understood the first part, but the second part of the question im unsure how to answer it, the way I have done it so far is for the first three years I have discounted by 3 years and for the subsequent years I have used the forumale Market Value = D0 (1 + g )/(re ? g) where g is 0.25*0.40, im unsure if I have done it correctly so farOctober 24, 2024 at 4:28 pm #712837It seems that you are doing it correctly 🙂
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