Problem 2. A company is considering investing 10% of all future earnings in growth. The company has a single growth opportunity that it can take either now or in one period. The return on investment is equally likely to be either 10% or 14% per year. Currently the firm pays out all earnings as a dividend of $10 million. If it does not make the investment, dividends are expected to remain at this level forever. Assuming the opportunity cost of capital is 10.1% per period, what is the value of the company just before the current dividend is paid (the cum-dividend value)? Problem 3. The R&D division of a company generates two new product proposals every three years on average. Typically, the investment opportunities the R&D division produces require an initial investment of $10 million and yield profits of $1 million per year that grow at one of three possible growth rates in perpetuity: 3%, 0%, and -3%. All three growth rates are equally likely for any given project. These opportunities are always "take it or leave it" opportunities: If they are not undertaken immediately, they disappear forever. Assume that the cost of capital will always remain at 12% per year. What is the present value of all future growth opportunities the company will produce? Problem 2. A company is considering investing 10% of all future earnings in growth. The company has a single growth opportunity that it can take either now or in one period. The return on investment is equally likely to be either 10% or 14% per year. Currently the firm pays out all earnings as a dividend of $10 million. If it does not make the investment, dividends are expected to remain at this level forever. Assuming the opportunity cost of capital is 10.1% per period, what is the value of the company just before the current dividend is paid (the cum-dividend value)? Problem 3. The R&D division of a company generates two new product proposals every three years on average. Typically, the investment opportunities the R&D division produces require an initial investment of $10 million and yield profits of $1 million per year that grow at one of three possible growth rates in perpetuity: 3%, 0%, and -3%. All three growth rates are equally likely for any given project. These opportunities are always "take it or leave it" opportunities: If they are not undertaken immediately, they disappear forever. Assume that the cost of capital will always remain at 12% per year. What is the present value of all future growth opportunities the company will produce
