financehelpplz
Apr 1, 2012, 03:13 PM
Here are two review questions for an upcoming quiz that I am getting stuck on,
Please help if you can, thanks.
1) Annual earnings of Northern Skiing, will be $7 per share in perpetuity if the firm makes zero new investments. Under this situation, the firm will pay out all of its earnings as dividends. Assume that the first dividend will be received exactly one year from today.
Alternatively, assume that in three years from now, and in every subsequent year in perpetuity, the company can invest 30% of its earnings in new projects. Each project is going earn 15% at year-end in perpetuity. The firms discount rate will be 11%.
a. What is the price per share of Northern Skiing, stock today without the company making the new investment?
b. If Northern Skiing announces that the new investment will be made, what will the per share stock price be today?
c. If the new project will earn 8% instead at year-end in perpetuity, should the firm make investment in new projects?
And...
2) UPS' current stock price is $ 30. It has 5 mil. Shares outstanding, zero in debt and cost of capital is 12%.
Today, the this announcement was made: "The Justice Department started an investigation on the hiring practices of the UPS. There is 60% probability that UPS will be found guilty of discriminatory hiring practices. If UPS is convicted, for the next 5 years, it will have to pay $5 mil. per year to a fund representing victims of UPS' policies." How would UPS' stock price respond to this announcement? And what could happen to the stock price over time until the decision was made?
And if this announcement was made instead of the previous one: "Earlier today the Justice Department reached a decision in the UPS case. UPS is guilty of discriminatory practices in hiring. For the next 5 years, UPS must pay $5 mil. per year to a fund representing victims of UPS' policies." If the market is efficient, how would UPS' stock price respond to the announcement ? Will you be able to sell UPS' stock upon hearing the announcement and turn a profit?
Please help if you can, thanks.
1) Annual earnings of Northern Skiing, will be $7 per share in perpetuity if the firm makes zero new investments. Under this situation, the firm will pay out all of its earnings as dividends. Assume that the first dividend will be received exactly one year from today.
Alternatively, assume that in three years from now, and in every subsequent year in perpetuity, the company can invest 30% of its earnings in new projects. Each project is going earn 15% at year-end in perpetuity. The firms discount rate will be 11%.
a. What is the price per share of Northern Skiing, stock today without the company making the new investment?
b. If Northern Skiing announces that the new investment will be made, what will the per share stock price be today?
c. If the new project will earn 8% instead at year-end in perpetuity, should the firm make investment in new projects?
And...
2) UPS' current stock price is $ 30. It has 5 mil. Shares outstanding, zero in debt and cost of capital is 12%.
Today, the this announcement was made: "The Justice Department started an investigation on the hiring practices of the UPS. There is 60% probability that UPS will be found guilty of discriminatory hiring practices. If UPS is convicted, for the next 5 years, it will have to pay $5 mil. per year to a fund representing victims of UPS' policies." How would UPS' stock price respond to this announcement? And what could happen to the stock price over time until the decision was made?
And if this announcement was made instead of the previous one: "Earlier today the Justice Department reached a decision in the UPS case. UPS is guilty of discriminatory practices in hiring. For the next 5 years, UPS must pay $5 mil. per year to a fund representing victims of UPS' policies." If the market is efficient, how would UPS' stock price respond to the announcement ? Will you be able to sell UPS' stock upon hearing the announcement and turn a profit?