Rite Bite Enterprises sells toothpicks. Gross revenues last year were $8.0 milli

Question

Rite Bite Enterprises sells toothpicks. Gross revenues last year were $8.0 million, and total costs were $3.9 million. Rite Bite has 1.2 million shares of common stock outstanding. Gross revenues and costs are expected to grow at 4 percent per year. Rite Bite pays no income taxes. All earnings are paid out as dividends. (Do not round intermediate calculations and round your answers to 2 decimal places. (e.g., 32.16))

If the appropriate discount rate is 14 percent and all cash flows are received at year’s end, what is the price per share of Rite Bite stock? $35.53

ONLY B NEEDED

Rite Bite has decided to produce toothbrushes. The project requires an immediate outlay of $17.5 million. In one year, another outlay of $6.5 million will be needed. The year after that, earnings will increase by $4.7 million. That profit level will be maintained in perpetuity. What will the new stock price be if the project is undertaken?

Rite Bite Enterprises sells toothpicks. Gross revenues last year were $8.0 million, and total costs were $3.9 million. Rite Bite has 1.2 million shares of common stock outstanding. Gross revenues and costs are expected to grow at 4 percent per year. Rite Bite pays no income taxes. All earnings are paid out as dividends. (Do not round intermediate calculations and round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

b)

Increase in Stock prcie= (-immediate outlay - another outlaynext year/1.14 + (Increase in Earning in year 2/14%)/1.14)/Outstanding Share

Increase in Stock prcie= (-17.5 -6.5/1.14 + (4.7/14%)/1.14)/1.2

Increase in Stock prcie= $ 5.21

New stock price = 35.53 + 5.21

New stock price = $ 40.74

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