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The annual earnings of Avalanche Skis Inc will be $4 per share in perpetuity if the firm makes no new investments. Under such a situation, the firm would pay out all of its earnings as dividends. Assume the first dividend will be received exactly one year from today. Alternately, assume that in 3 years from now, and every subsequent year in perpetuity, the company can invest 25% of its earnings in new projects. Each project will earn 40% in perpetuity. The required interest rate of the firm is 14%. (more precisely, assume the investment is made at the beginning of each year, with the first cash flow from each project commencing at the end of the year)

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M948312

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