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2. California Electronics, Inc., expects to eam $100 million per year in perpetuity if it does not undertake any new projects. The firm has
2. California Electronics, Inc., expects to eam $100 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity that requires an investment of $15 million today and $5 million in one year. The new investment will begin to generate additional annual earnings of $10 million two years from today in perpetuity. The firm has 20 million shares of common stock outstanding, and the required rate of retum on the stock is 15 percent. (a) What is the price of a share of the stock if the firm does not undertake the new project? (b) What is the value of the growth opportunities resulting from the new project? (c) What is the price of a share of the stock if the firm undertakes the new project?
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