Question
Matts Manufacturing, Inc. expects to earn $45 million per year in perpetuity if it does not undertake any new projects. However, the firm has an
Matts Manufacturing, Inc. expects to earn $45 million per year in perpetuity if it does not undertake any new projects. However, the firm has an investment opportunity that will generate annual earnings of $10 million in perpetuity, beginning two years from today. This investment has an initial (upfront) cost of $10 million today and $5 million next year. The firm has 10 million shares of common stock outstanding, and the required rate of return on the stock is 10% percent. What is the stock price per share if the firm undertakes the investment?
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