Compaq Computer has seen its stock price decline from \($45\) to \($24\) The firm is expected to reinvest 50% of its expected after-tax operating income of \($2\) billion in new investments, and expects to earn a return on capital of 10.69%. The firm is all equity financed and has a cost of equity of 11.5%.

a. What is the firm’s expected growth rate, assuming that it maintains its existing reinvestment rate and return on capital?

b. Assuming that this growth is perpetual, what is the value of the firm?

c. How much value is being created or destroyed by the firm’s new investments?