Lincoln Umbrellas, Inc. today expects to earn $8.50 per share for each of the future operating periods (beginning at Time 1), today if the firms makes no new investments and returns the earnings as dividends to the shareholders. However, Brian Jones, president and CEO, has discovered an opportunity to retain and invest 20 percent of the earnings beginning three years from today. This opportunity to invest will continue for each period indefinitely. He expects to earn 10 percent on this new equity investment, the return beginning one year after each investment is made. The firm’s equity discount rate is 12 percent.
What is the price per share of Lincoln Umbrellas, Inc. stock without making the new investment?
If the new investment is expect to be made, per the preceding information, what would the price of the stock be now?
NSTRUCTIONS: Finance professionals need to know the impact on the value of a firm’s stock if the company decides to invest in growing the business or not to invest in the business.