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Total Return = ke = Dividend Yield (DY) + Capital Gains Yield (CGY) = D1/PO+ (P1 - PO)/P0 = D1/PO + g Estimation of the Growth Rate (g): g = Retention Ratio * ROE Question: Tobias Industries expects to earn $100,000 this year. Earnings will grow 6% if the firm makes no new investments. Jim Tobias, CEO of the firm, has the opportunity to invest in a "new" line of business - which will complement their current products. The immediate outlay for this opportunity is $200,000 and the earnings from the line will generate $80,00 O in additional earnings (per year, in perpetuity). The earnings from this new line will grow at 4 percent. Assuming the firm's discount rate is 12%, and 200,000 shares of Tobias Industries stock is outstanding, answer the following? a) What is the price per share of Tobias stock without the cabinet line? b) What is the value of the growth opportunities which the "new" line offers? c) If the company invests in the "new" line, what would be the price of the stock?

Total Return = ke = Dividend Yield (DY) + Capital Gains Yield (CGY) = D1/PO+ (P1 - PO)/P0 = D1/PO + g Estimation of the Growth Rate (g): g = Retention Ratio * ROE Question: Tobias Industries expects to earn $100,000 this year. Earnings will grow 6% if the firm makes no new investments. Jim Tobias, CEO of the firm, has the opportunity to invest in a "new" line of business - which will complement their current products. The immediate outlay for this opportunity is $200,000 and the earnings from the line will generate $80,00 O in additional earnings (per year, in perpetuity). The earnings from this new line will grow at 4 percent. Assuming the firm's discount rate is 12%, and 200,000 shares of Tobias Industries stock is outstanding, answer the following? a) What is the price per share of Tobias stock without the cabinet line? b) What is the value of the growth opportunities which the "new" line offers? c) If the company invests in the "new" line, what would be the price of the stock?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Total Return = ke = Dividend Yield (DY) + Capital Gains Yield (CGY) = D1/PO+ (P1 - PO)/P0 = D1/PO + g Estimation of the Growth Rate (g): g = Retention Ratio * ROE Question: Tobias Industries expects to earn $100,000 this year. Earnings will grow 6% if the firm makes no new investments. Jim Tobias, CEO of the firm, has the opportunity to invest in a "new" line of business - which will complement their current products. The immediate outlay for this opportunity is $200,000 and the earnings from the line will generate $80,00 O in additional earnings (per year, in perpetuity). The earnings from this new line will grow at 4 percent. Assuming the firm's discount rate is 12%, and 200,000 shares of Tobias Industries stock is outstanding, answer the following? a) What is the price per share of Tobias stock without the cabinet line? b) What is the value of the growth opportunities which the "new" line offers? c) If the company invests in the "new" line, what would be the price of the stock?
Transcribed Image Text:Total Return = ke = Dividend Yield (DY) + Capital Gains Yield (CGY) = D1/PO+ (P1 - PO)/P0 = D1/PO + g Estimation of the Growth Rate (g): g = Retention Ratio * ROE Question: Tobias Industries expects to earn $100,000 this year. Earnings will grow 6% if the firm makes no new investments. Jim Tobias, CEO of the firm, has the opportunity to invest in a "new" line of business - which will complement their current products. The immediate outlay for this opportunity is $200,000 and the earnings from the line will generate $80,00 O in additional earnings (per year, in perpetuity). The earnings from this new line will grow at 4 percent. Assuming the firm's discount rate is 12%, and 200,000 shares of Tobias Industries stock is outstanding, answer the following? a) What is the price per share of Tobias stock without the cabinet line? b) What is the value of the growth opportunities which the "new" line offers? c) If the company invests in the "new" line, what would be the price of the stock?
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