Investors know for sure that the CEO of firm A will undertake an investment that

Question

Investors know for sure that the CEO of firm A will undertake an investment that will yild $100 million profit next year and then $2 million each year after that for 10 years. They also know for sure that the CEO of firm B will undertake an investment that will yield nothing for two years and then a profit of $20 million per year for 10 years.

3) The investors in exercise 2 are surprised by firm's performance in year 5. Instead of being $20 million, the firm's profits are $40 million. What happens to firm B's stock price in year 6 and 7?

Explanation / Answer

 company B  will have the higher stock price today and also for the next  next, second year, the third year company A WILL LEAD

A company has an investment project that would cost $10 million today and yield a payoff of $15 million in 4 years.a. Should the firm undertake the project if the interest rate is 11 percent?(10 x 1.114) = $15.18 million. This is more than the "expected payoff," so investing in it is essentially a loss of money. The firm should NOT invest.10percent? (10 x 1.14) = $14.64 million YES! This is less than the expected payoff, so the firm SHOULD invest!9 percent? (10 x 1.094) = 9% < 10%,

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