The investors in exercise 2 are surprised by firms, Ask an Expert

Economics

1) Investors know for sure that the CEO of firm A will undertake an investment that will yild $100 million profit next year and then $2 million each year after that for 10 years. They also know for sure that the CEO of firm B will undertake an investment that will yield nothing for two years and then a profit of $20 million per year for 10 years. Which company will have the higher stock price today, next year, the second year, the third year?

2) The investors in exercise 2 are surprised by firm's performance in year 5. Instead of being $20 million, the firm's profits are $40 million. What happens to firm B's stock price in year 6 and 7?

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Business Economics, Economics

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