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California Real Estate, Inc., expects to earn $ 7 5 million per year in perpetuity if it does not undertake any new projects. The firm
California Real Estate, Inc., expects to earn $ million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity to invest $ million today and $ million in one year in real estate. The new investment will generate annual earnings of $ million in perpetuity, beginning two years from today. The firm has million shares of common stock outstanding, and the required rate of retun on the stock is percent. Land investments are not depreciable. Ignore taxes.
a What is the price of a share of stock if the firm does not undertake the new investment?
b What is the value of the investment?
C What is the pershare stock price if the firm undertakes the investment?
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