Pine Stix, Inc. sells toothpicks. Gross revenues for the year just ended were $3 million and total costs were $1.5 million. The dividend for the prior year has just been paid and the new year is about to start. Gross revenues and costs are expected to grow at 5 percent per year forever. Pine Stix pays no income taxes and all earnings are paid out as dividends. Pine Stix has 1 million shares of common stock outstanding.
a. If the expected return rate on stocks like Pine Sitx is 15 percent and all cash flows are received at year's end, what is the price per share of Pine Stix stock today (i.e., at t=0)?
b. The president of Pine Stix has decided to begin a program to produce toothbrushes. The project requires an immediate outlay of $3 million. In one year, another outlay of $2 million will be needed. The year after that, net cash inflows will be $3 million from the project. This level of net cash inflows from the project isexpected to continue in perpetuity. What effect will undertaking this project has on the price per share of Pine Stix's stock today (i.e., at t=0)?