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BlueVein Ltd, a small listed cheese-making company had revenues last year of $45 million and total costs of $15 million. Blue Vein has 140 million
BlueVein Ltd, a small listed cheese-making company had revenues last year of $45 million and total costs of $15 million. Blue Vein has 140 million shares of common stock outstanding. Gross revenues and costs are expected to grow at 5 percent per year on this existing business. Blue Vein pays tax at 25 cents in the dollar. Please assume all earnings are paid out as dividends.
- If the appropriate discount rate is 8 percent per annum and all cash flows are received at year's end, what is the price per share of Blue Vein Ltd's stock?
- Blue Vein Ltd has decided to start a new project. This project requires an immediate outlay of $35 million. In one year, another outlay of $30 million will be needed. In the second year from today and onward, earnings from the new project will be a steady $20 million (before tax) per year, maintained in perpetuity. What effect will undertaking this new project have on the price per share of Blue Vein's stock? Please calculate the new expected share price.
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