1 Company Qs current return on equity (ROE) is 16%. The firm pays out 60 percent of its earnings as cash dividends. (payout ratio = .60). Current book value per share is $62. Book value per share will grow as Q reinvests earnings. Assume that the ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 12.5% and the payout ratio increases to .80. The cost of capital is 12.5%.

a). What are Qs EPS and dividends in years 1, 2, 3, 4, and 5? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b) What is Qs stock worth per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

2 Compost Science Inc. (CSI) is in the business of converting Bostons 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 $5 dividend. It has been reinvesting 30% 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?

a-2 What part of the $100 price is attributable to the present value of growth opportunities?

b. Now the MDC announces a plan for CSI to treat Cambridge sewage. CSIs plant will, therefore, be expanded gradually over five years. This means that CSI will have to reinvest 60% of its earnings for five years. Starting in year 6, however, it will again be able to pay out 70% of earnings. What will be CSIs stock price once this announcement is made and its consequences for CSI are known? (Do not round intermediate calculations. Round your answers to 2 decimal places.)