Question
Hyperbola Corp currently has no growth opportunities and pays out all of its earnings as dividends to its shareholders, with an enviable EPS of $8.25.
Hyperbola Corp currently has no growth opportunities and pays out all of its earnings as dividends to its shareholders, with an enviable EPS of $8.25. It has a one-time investment opportunity in a year from now that will require an investment of $1.60/share at that time, but will increase the earnings per share by $2.10 and $2.45 for the subsequent two years. Once this project is done (after three years), Hyperbola Corp will once again return to its current dividend payout policy. Assume the cost of equity is 12%.
A) If Hyperbola does not take on the investment, what is its current share price?
B) If Hyperbola does take on this investment, what will its share price be today?
C) If Hyperbola does take on the investment, what will its share price be in four years time?
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