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I only need help with question 3 2. The annual earnings of BouncingBall Tennis will be $5 a share in perpetuity if the firm makes
I only need help with question 3
2. The annual earnings of BouncingBall Tennis will be $5 a share in perpetuity if the firm makes no new investments. BouncingBall has a one-time opportunity, occurring three years from now, to invest 25% of its earnings (at that time) into a new project. For each dollar invested, earnings increase by $0.40 in the subsequent year and then remain at this new level in perpetuity. Assume the firm's discount rate is 14%. (a) What is the price per share of Bouncing Ball Tennis stock today, without making the new investment? (b) What is the price if the new investment is made? 3. Continue with the setting of the previous problem. However, now assume that the opportunity to invest 25% of BouncingBall's earnings is not just a one-time opportunity Syllabus (4).pdf "ccurring three years from now, but is also available in each subsequent year. That is, assume that three years from now, and in every subsequent year in perpetuity, the company can invest 25% percent of its earnings in new projects and that for each dollar invested, earnings increase by $0.40 in the subsequent year and then remain at this new level in perpetuity. If Bouncing Ball makes this investment every year (starting in year three), what should be the price per share of its stock? 2. The annual earnings of BouncingBall Tennis will be $5 a share in perpetuity if the firm makes no new investments. BouncingBall has a one-time opportunity, occurring three years from now, to invest 25% of its earnings (at that time) into a new project. For each dollar invested, earnings increase by $0.40 in the subsequent year and then remain at this new level in perpetuity. Assume the firm's discount rate is 14%. (a) What is the price per share of Bouncing Ball Tennis stock today, without making the new investment? (b) What is the price if the new investment is made? 3. Continue with the setting of the previous problem. However, now assume that the opportunity to invest 25% of BouncingBall's earnings is not just a one-time opportunity Syllabus (4).pdf "ccurring three years from now, but is also available in each subsequent year. That is, assume that three years from now, and in every subsequent year in perpetuity, the company can invest 25% percent of its earnings in new projects and that for each dollar invested, earnings increase by $0.40 in the subsequent year and then remain at this new level in perpetuity. If Bouncing Ball makes this investment every year (starting in year three), what should be the price per share of its stockStep by Step Solution
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