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    Stock Values and Growth Opportunities - Brennan Co

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    Stock Values
    The Brennan Co. just paid a dividend of $1.40 per share on its stock. The dividends are expected to grow at a constant rate of 6% per year indefinitely. If investors require a 12% return on the Brennan Co. stock, what is the current price? What will the price be in three years? In 15 years?

    Growth Opportunities
    California Real Estate, Inc. expects to earn $110 million per year in perpetuity if it does not undertake any new projects and returns all the earnings as dividends to the shareholders. The firm has an opportunity to invest $12 million today and $7 million in one year in real estate. The new investment will generate annual earnings of $10 million in perpetuity, beginning two years from today. The firm has 20 million shares of common stock outstanding, and the required rate of return on the stock is 15%.

    (a) What is the per-share stock price if the firm does not undertake the new investment?

    (b) What is the per-share present value of the investment?

    (c) What is the per-share stock price if the firm undertakes the investment?

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    Solution Preview

    Stock
    Div in one year / (discount rate - growth rate)
    Current = 1.4*(1.06^1)/(.12-.06) = 24.73
    3 Years = 1.4*(1.06^4)/(.12-.06) = 29.46
    15 Years = ...

    Solution Summary

    This solution provides intermediate steps and formulas for problems regarding stock values and growth opportunities with Brennan Co.

    $2.19

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