Problem:
Mega capital Co. generates $5 per share in earnings and it has 1,000,000 shares outstanding. Since Mega Capital has no growth opportunities, it pays out all of its earnings as dividends. This situation is expected to last into the foreseeable future. Suppose that just as the New Year starts, a new, unexpected investment opportunity becomes available to Mega Capital. If Mega Capital invests, it will need to pay $5 million at the end of the current year, and will have cash inflows of $4 million and $6 million at the end of the following two years.
Required:
Question: What is the price of a share in Mega Capital after investors find out about the new investment opportunity?
Note: Show supporting computations in good form.