Question
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,
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 firms discount rate is 14%.
(a) What is the price per share of BouncingBall Tennis stock today, without making the new investment?
(b) What is the price if the new investment is made?
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Intermediate Accounting
Authors: Donald Kieso, Jerry Weygandt, Terry Warfield, Nicola Young,
10th Canadian Edition, Volume 1
978-0176509736
