(Solution Document) Sarro Shipping, Inc., expects to earn $1.2 million per year in perpetuity if it undertakes no new investment opportunities.


Sarro Shipping, Inc., expects to earn $1.2 million per year in perpetuity if it undertakes no new investment opportunities. There are 120,000 shares of stock outstanding, so earnings per share equal $10 ($1,200,000/120,000). The firm will have an opportunity at date 1 to spend $1,200,000 on a new marketing campaign. The new campaign will increase earnings in every subsequent period by $240,000 (or $ 2 per share). The firm's discount rate is 10 percent. What is the value per share before and after deciding to accept the marketing campaign? Make sure to show your work.

 







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