CashCow Inc is all equity financed and generates perpetual annual EBIT

CashCow Inc is all equity financed and generates perpetual annual EBIT of $100. Assume that the EBIT, and all other cash flows, occur at year end and that we are currently at the beginning of a year.

CashCow has 150 shares outstanding and shareholders require a return of 10%. CashCow hires a new CEO, a Mr. Cowslowski, who spends 10% of EBIT on parties, houses and yachts. Assume that this spending is expected to continue in perpetuity. What price will the shares trade at after Mr. Cowslowski is hired? The tax rate is 40%.
A) $3.20
B) $3.40
C) $3.60
D) $3.80
E) $4.00

ANSWER

C