Question: Measuring Value Added (Medium)
a. Buying a stock. A firm is expected to pay an annual dividend of $2 per share forever. Investors require a return of 12 percent per year to compensate for the risk of not receiving the expected dividends. The firm's shares trade for $19 each. What is the value added by buying a share at $19?
b. An investment within a firm. The general manager of a soccer club is considering paying $2.5 million per year for five years for a "star" player, along with a $2 million upfront signing bonus. He expects the player to enhance gate receipts and television advertising revenues by $3.5 million per year with no added costs. The club requires a 9 percent return on its investments. What would be the value added from the acquisition of the player?