Compost Science Incorporated (CSI) is in the business of converting Boston's sewage sludge into fertilizer. The...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Compost Science Incorporated (CSI) is in the business of converting Boston's sewage sludge into fertilizer. The business is not in itself very profitable. However, to induce CSI to remain in business, the Metropolitan District Commission (MDC) has agreed to pay whatever amount is necessary to yield CSI a 12% book return on equity. At the end of the year, CSI is expected to pay a $3 dividend. It has been reinvesting 40% of earnings and growing at 4% a year. a-1. Suppose CSI continues on this growth trend. What is the expected long-run rate of return from purchasing the stock at $100? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number. a-2. What part of the $100 price is attributable to the present value of growth opportunities? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. Now the MDC announces a plan for CSI to treat Cambridge sewage. CSI's plant will, therefore, be expanded gradually over five years. This means that CSI will have to reinvest 80% of its earnings for five years. Starting in year 6, however, it will again be able to pay out 60% of earnings. What will be CSI's stock price once this announcement is made and its consequences for CSI are known? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Answer is not complete. a-1. Rate of return 7 % a-2. PVGO $ 28.57 b. Stock price Return Compost Science Incorporated (CSI) is in the business of converting Boston's sewage sludge into fertilizer. The business is not in itself very profitable. However, to induce CSI to remain in business, the Metropolitan District Commission (MDC) has agreed to pay whatever amount is necessary to yield CSI a 12% book return on equity. At the end of the year, CSI is expected to pay a $3 dividend. It has been reinvesting 40% of earnings and growing at 4% a year. a-1. Suppose CSI continues on this growth trend. What is the expected long-run rate of return from purchasing the stock at $100? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number. a-2. What part of the $100 price is attributable to the present value of growth opportunities? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. Now the MDC announces a plan for CSI to treat Cambridge sewage. CSI's plant will, therefore, be expanded gradually over five years. This means that CSI will have to reinvest 80% of its earnings for five years. Starting in year 6, however, it will again be able to pay out 60% of earnings. What will be CSI's stock price once this announcement is made and its consequences for CSI are known? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Answer is not complete. a-1. Rate of return 7 % a-2. PVGO $ 28.57 b. Stock price Return
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
Read the Comp & Ben Case Study and answer the following question: To the degree job growth (and increased car sales that come from m costs) is based on two tier-wage structures, how sustainable...
-
The Mound View Motel opened for business on May 1, 2010. Its trial balance before adjustment on May 31 is as follows In addition to those accounts listed on the trial balance, the chart of accounts...
-
Suppose that a company owns a building. The company enters into a sale and leaseback arrangement to sell the building and then lease it back. The company makes a substantial profit on the sale. How...
-
What are the risks associated with inaction?
-
Marin Company is currently producing 16,000 units per month, which is 80% of its production capacity. Variable manufacturing costs are currently $8.00 per unit. Fixed manufacturing costs are $56,000...
-
Is your investment philosophy conservative, moderate, or aggressive? Give two reasons to support the adoption of your philosophy. How does your view compare with the philosophies of other members of...
-
In a certain material the equation of motion for the polarization is dg dt dgo dt + v +w = 2,w8 where is the total field in the dielectric. Find the relation between and when = Re(Eeat) and E is...
-
Kashish's investment portfolio consists of 50% Pizzalicious Co., 25% Kraft Cheese Int'l and 25% Doughboy Inc. The return on each stock is 10%, 15% and 20% respectively. What is the return on the...
-
Discuss Briefly the principles that you have used in preparing your report. This will be a minor part of the case study. For instance, did you seek simplicity etc?
-
set up a skeletal statement Gross sales $387,360 Customer returns and allowences $ 33,315 Gross Margin 44.6% loss (1.2%)
-
Four independent situations are described below. Each involves future deductible amounts and/or future taxable amounts produced by temporary differences: Taxable income Future deductible amounts...
-
what are some of the challenges and opportunities in the human resource area as it relates to expanding businesses or new businesses entering the market?
-
Marybeth and Anneal Yao are beginning to contemplate retirement. They are each forty-five years of age and have saved a total of $500,000 for retirement. Marybeth and Anneal realize that they have...
-
The Pletcher Transportation Company uses a responsibility reporting system to measure the performance of its three investment centers: Planes, Taxis, and Limos. Segment performance is measured using...
-
Amortization of Discount Ortega Company issued five-year, 5% bonds with a face value of $50,000 on January 1, 2008. Interest is paid annually on December 31. The market rate of interest on this date...
-
The Russo Theater will begin operations in March. The Russo will be unique in that it will show only triple features of sequential theme movies. As of March 1. the ledger of Russo showed: No. 101...
-
Amortization of Premium Assume the same set of facts for Ortega Company as in Problem 10-2A except that the market rate of interest of January 1, 2008, is 4% and the proceeds from the bond issuance...
Study smarter with the SolutionInn App