Gross revenue last year were $9.9 million, and total costs were $5.0 million. Blaine Company has 1.6 million shares of common stock outstanding. Gross revenues and costs are expected to grow at 6 percent per year.
a. If the appropriate discount rate is 16 percent and all cash flows are received at year's end, what is the price per share of stock?
b. Blaine Company has decided to produce Books. The project requires an immediate outlay of $18.6 million. In one year, another outlay of $7.6 million will be needed. The year after that earnings will increase by $5.8 million. That profit level will be maintained in perpetuity. What will the new stock price be if the project is undertaken?