hmk3 - be today ? 2. Your Company is deciding whether to...

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Team Assignment – 3 ( due : Thursday, March 4 ) 1. The annual earnings of XYZ Inc ., will be $ 5 per share for the next three years after which it will be $ 6 per share in perpetuity if the firm makes no new investments . Under such a situation the firm would pay out all of its earnings as dividends . Assume the first dividend will be received exactly one year from now . The firm s discount rate is 11 percent . (a) What is the price per share of XYZ stock today ? (b) Now assume that XYZ has the following investment opportunity Six years from now , and in every subsequent year in perpetuity , the company can invest 30 percent of its earnings in new projects . Each project will earn 25 percent at year - end in perpetuity . If XYZ announces that the new investments will be made , what will the per-share stock price
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Unformatted text preview: be today ? 2. Your Company is deciding whether to buy a new machine . The machine costs $ 3 . 5 million now and requires maintenance costs of $ 350 , 000 at the end of each year during its economic life of five years . The revenues will increase by $ 1 , 300 , 000 each year . At the end of the five years , the machine will have a salvage value of $ 800 , 000 . It will be depreciated using the 5-year class MACRS depreciation rates of 20 % , 32 % , 19 . 2 % , 11 . 52 % , and 11 . 52 % , respectively , over its economic life . The corporate tax rate is 34 percent and the appropriate discount rate is 11 percent . The company is assumed to earn sufficient revenues to generate tax shields from depreciation . Estimate the NPV of the purchase decision ....
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This note was uploaded on 05/23/2011 for the course ECON 402 taught by Professor Kanner during the Spring '11 term at DePaul.

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