Question
Corum Inc. expects to earn $120 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity to
Corum Inc. expects to earn $120 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity to invest $15 million today, $10 million in one year and $5 million in two years. The cash inflow will grow at a rate of g thereafter. The firm has 5 million shares of common stock outstanding, and the required rate of return on the stock is 15 percent. Ignore taxes and depreciation.
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What is the stock price if the firm does not make the new investment?
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What is the impact of new investment on the stock price if g is equal to 2 percent? What is the new stock price?
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At what constant growth rate (g) would the new investment just break even?
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