Q1.MB Rowing inc is evaluating a new project at t=0. Assume the following: Current EPS ( earning per share) is $10.00 The company currently pay out all earning as dividend The company has just paid the dividend NED had a new project that requires a per share investment of $1.95 at t=1 The new project last two years The expected increase in earning is $2.75 at t=2 and $3.25 at t=3 Investors requires a return of 14% There are no taxes Assume earnings noted above equal cash flow. If MB Rowing inc, announces it will undertake the investment, what is the new value ( price) per share at t=0.
Q2.A start up company, VLED inc, evaluate the following new business venture:
Forecasted sales are 315 bottles of energy drink sold per year in perpetuity
At t=1 each energy drink sells for $1.25 in real term
The real price of each energy drink then increase at a rte of 8%
At t=1 each energy drink costs $0.90 in real term
The real cost of each energy drink then increase at a rate of 6%
The real discount rate is 10%
The applicable tax rate is 34%
There are no working capital or capital spending requirements
The only business VLED, inc, participate in is the energy drink under evaluation
What is VLED, Inc worth today?
Q3.
GM Cat Emporium has an outstanding perpetual bond with a 10% coupon rate that can be called in one year. In addition,
The bond makes annual coupon payment
Par value is $1000
The call premium is $150 above par value
In one yeat there is
A 55% probability the interest rate is 14% and
A 45% probability the interest rate is 7%
The current interest rate is 10%
Once the interest rate change is revealed at t=1, the interest rate remains fixed forever.
What is the current market price of the bond?