42. Nonconstant Growth. Compost Science, Inc. (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 10% return on investment. At the end of the year, CSI is expected to pay a $4 dividend. It has been reinvesting 40% of earnings and growing at 4% a year. (LO2)

a. Suppose CSI continues on this growth trend. What is the expected rate of return for an inves- tor who purchases the stock at the market price of $100?

b. What part of the $100 price is attributable to the present value of growth opportunities?

c. Now the MDC announces a plan for CSI to also treat Cambridge sewage. CSI's plant will therefore be expanded gradually over 5 years. This means that CSI will have to reinvest 80% of its earnings for 5 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 conse- quences for CSI are known?