(10 points) Sabino Equipment, Inc., expects to earn $10 million per year in perp
ID: 1170361 • Letter: #
Question
(10 points) Sabino Equipment, Inc., expects to earn $10 million per year in perpetuity if it undertakes no new investment opportunities. There are 1,000,000 shares of stock outstanding. The firm will have an opportunity at Date 1 to spend $5 milion on a new product. The new product will increase earnings in every subsequent period by $750,000 This is a 15 percent return per year on the project. The firm's discount rate is 10 percent. What is the value per share before and after deciding to accept the new product?Explanation / Answer
value of firm before investing into project
earning/discount rate
100000000
value of project
earning/discount rate
7500000
total value of firm after the project
107500000
value of share before project
100000000/1000000
100
no of share after financing the project
(100000000+5000000)/100
1050000
value of share after project
107500000/1050000
102.38
value of firm before investing into project
earning/discount rate
100000000
value of project
earning/discount rate
7500000
total value of firm after the project
107500000
value of share before project
100000000/1000000
100
no of share after financing the project
(100000000+5000000)/100
1050000
value of share after project
107500000/1050000
102.38
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