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solution

Big Giant Head, Inc. is currently a cash cow with 100,000 shares of stock issued. As a cash cow, its earnings are $1 million per year. The next annual dividend will be paid today, and the annual discount rate is 8%. Suppose the company is deciding whether to retain all of its earnings one year from now and invest them in a project which will generate a 40% return, paid 4 years from today. From year two onward, the company will continue to act as a cash cow. If Big Giant Head, Inc. decides to take this investment, how will this affect the current price per share of its stock?

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