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Lecture06extra_winter09

Lecture06extra_winter09 - EXAMPLE CHAPTER 5 PROBLEM 37...

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EXAMPLE
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CHAPTER 5, PROBLEM 37 Lewin Skis, Inc (today) expects to earn $6 per share for each of the future operating periods (beginning at time 1) if the firm makes no new investments and returns the earnings as dividends. However, the president found an investment opportunity to retain and invest 30% of the earnings, beginning three years from today.
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This opportunity to invest will continue for each period indefinitely. He expects to earn 12% on this new equity investment, the return beginning one year after each investment is made. The firm’s equity discount rate is 14% throughout.
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What is the price of Lewin Skis without making the new investments? If the investment is expected to be made, what would be the new price of the stock? Suppose you could increase the investment in the project by whatever amount you chose. What would be the retention ratio needed to make this project attractive?
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Lewin Skis, Inc ( today ) expects to earn $6 per share for each of the future operating periods (
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