Due to different legal and regulatory practices, MLC eventually decides to form a subsidiary company to acquire and run the business on the Oregonian woodland. MLC forecasts that the new company will pay ZERO dividends in the first 5 years due to the ongoing sustainability project, but starting from the 6th year the new company will pay $1/share with constant 5% growth rate.
Question 1: What is the new company's value per share now? Assuming 15% required return rate by potential investors.
Price = D1/(R-g) $1/(0.15-0.05)= $10
Question 2: If a recent report says that after 10 years new technology will reduce the demand for wooden materials, so MCL has adjusted the growth rate (for both income and dividends) from 5% to 3% starting from the 10thyear. What is the new company's value per share now? Assuming 15% required return rate by potential investors(10 points)
Price = D1/(R-g) $1/(0.15-0.03) = $8.33