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Answer to Question #74224 in Microeconomics for zulfiqar

Question #74224
A firm develops a new product that will add 1 Million to profit each year for five years. If the discount rate is 10 percent per year, how much will this new product add to shareholder value?
Expert's answer
The Value of a stock is given by Dividend per share divided by discount rate minus growth rate.
Value of stock = (dividend per share)/ (discount rate – growth rate)
Value of stock = {(100,000)/ (5 – 0.1)}* 1/100 =100,000/4.9 = 204.08/100 = 2.0408%

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