INVESTMENTS DIRECTIONS: Here is the Unit #3 Weekly Writing Assignment that you should submit to your Unit #3 Homework Assignment Folder

 INVESTMENTS

DIRECTIONS: Here is the Unit #3 Weekly Writing Assignment that you should
submit to your Unit #3 Homework Assignment Folder.
Please submit your Unit #3 Writing Assignment Answer Sheet in MS Word format
with the following file name: LastNameFirstInitial_Unit 03_Writing
Assignment.docx. For example, if you name is John Smith, the file name should be
SmithJ_Unit03_Writing Assignment.docx.
If you have any questions or comments, please do not hesitate to contact me.

NAME: _____________________________________
Lincoln Umbrellas, Inc. today expects to earn $8.50 per share for each of the future
operating periods (beginning at Time 1), today if the firms makes no new investments and
returns the earnings as dividends to the shareholders. However, Brian Jones, president
and CEO, has discovered an opportunity to retain and invest 20 percent of the earnings
beginning three years from today. This opportunity to invest will continue for each period
indefinitely. He expects to earn 10 percent on this new equity investment, the return
beginning one year after each investment is made. The firm’s equity discount rate is 12
percent.
Summary:
Perpetual earnings / dividend $8.50
Year for investment opportunity 3
Percentage of return for project 10%
Required return 12%
A. What is the price per share of Lincoln Umbrellas, Inc. stock without making the
new investment?
B. If the new investment is made, per the preceding information, what would the
price of the stock be now?
C. Should Brian Jones go forward with the growth opportunity?