a. XYZ Corporation has 1 million shares of stock outstanding and has annual income of $8 million. The company has no expansion opportunities and depreciation equals the replacement cost necessary to maintain operations. Therefore income is available to distribute as dividends and is expected to continue indefinitely. The cost of capital is 14%. What is the current value per share of XYZ Corporation stock?
b. A new opportunity arises for XYZ. The investment will cost $1 million three (3) years from now (t = 3) and will generate income available for dividends of $500,000 in year 4, $600,000 in year 5 and $700,000 in year 6. What is the value today per share of that future investment opportunity?