Answer:
a. Calculation of PV of the gross revenue
PV(revenue) = $8,000,000*(1+4%) / (14%-4%) = $83,200,000
Calculation of PV of the total cosst
PV(revenue) = $3,900,000*(1+4%) / (14% - 4%) = $40,560,000
Since there is no tax, the Pv of divided will be: Dividend = $83,200,000-$40,560,000 = $42,640,000
Calculation of price per share
Price per share = Present value dividend / Share outstanding = $42,640,000 / 1,200,000 = $35.53
b. Increase in Stock prcie= (-Immediate outlay - Another outlay next year/1.14 + (Increase in Earning in year 2/14%)/1.14)/Outstanding Share
Increase in Stock price= (-17.5 -6.5/1.14 + (4.7/14%)/1.14)/1.2
Increase in Stock price = $5.21
New stock price = $35.53 + 5.21
New stock price = $40.74
