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Rite Bite Enterprises sells toothpicks. Gross revenues last year were $9.5 million, and total costs were...

Rite Bite Enterprises sells toothpicks. Gross revenues last year were $9.5 million, and total costs were $4.8 million. Rite Bite has 1.4 million shares of common stock outstanding. Gross revenues and costs are expected to grow at 7 percent per year. Rite Bite pays no income taxes. All earnings are paid out as dividends. (Do not round intermediate calculations and round your answers to 2 decimal places. (e.g., 32.16))

  

a.

If the appropriate discount rate is 12 percent and all cash flows are received at year’s end, what is the price per share of Rite Bite stock?

  

  Price per share $ 71.69

  

b.

Rite Bite has decided to produce toothbrushes. The project requires an immediate outlay of $18.4 million. In one year, another outlay of $7.4 million will be needed. The year after that, earnings will increase by $5.6 million. That profit level will be maintained in perpetuity. What will the new stock price be if the project is undertaken?

  

  Price per share $   
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Answer #1

Given,

Gross Revenues = $ 9.5 million or $ 9500000

Total costs = $ 4.8 million or $ 4800000

Shares outstanding = 1.4 million or 1400000

Growth rate (g) = 7% or 0.07

Discount rate (r) = 12% or 0.12

Solution :-

Earnings = Gross revenues - total costs I $9500000 - $ 4800000 = $4700000 Earnings per Shave - Earnings Shades Outstanding $3.59199 O.OS $71.84 Immediate outlay (G) = $18.4 million $18400000 Outlay in one year (C) = $7.4 million $7400000 Increase inNPUGO - 18400000 - 7400000 + (5600000/0.13) 1+ 0.12 1+0.12 5 - 18400000 - 7400000 1.13 + 46666666.6666 1.12 - -18400000 - 660

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