Question
a) Dereks company has existing assets that generate Earnings Per Share EPS of $5. If Derek does not invest except to maintain existing assets, EPS
a) Dereks company has existing assets that generate Earnings Per Share EPS of $5. If Derek does not invest except to maintain existing assets, EPS is expected to remain constant at $5 a year. However, starting next year, Derek an opportunity to invest $3 per share a year in developing a new technology. Each investment is expected to generate a 20% return (assume that this return is not compounded, so each year the return is 3 x .2). The technology will be fully developed by the end of the fith year. What will be the stock price and PE ratio assuming that investors require a 12%? [Hint: use the dividend discount model]
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