Lecture06extra_winter09

Lecture06extra_winter09 - EXAMPLE CHAPTER 5, PROBLEM 37...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
EXAMPLE
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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.
Background image of page 2
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.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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?
Background image of page 4
Lewin Skis, Inc ( today ) expects to earn $6 per share for each of the future operating periods
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/28/2012 for the course ECON 134a taught by Professor Lim during the Winter '08 term at UCSB.

Page1 / 17

Lecture06extra_winter09 - EXAMPLE CHAPTER 5, PROBLEM 37...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online