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ABC Co. is expected to pay dividends of $5 per share one year from now. This amount is expected to remain constant forever and the
ABC Co. is expected to pay dividends of $5 per share one year from now. This amount is expected to remain constant forever and the relevant discount rate is 10%. We can see (i.e. given) that based on this information above, the value (equals price) of the stock is $50 per share today. Now suppose ABC announces that it can retain and invest 10% of its earnings each year starting one year from now (i.e. in year 1) and continuing forever. These investments will earn a return on equity of 25%. What is the net present value of these growth opportunities (NPVGO)? Make the usual assumptions (ie., cash flows earned one year after investments and onwards, growth as in the standard case) [Note: longer question] O a. $30 O b. $10 O c. $2.94 O d. $7.14
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