1. BBA-FB Limited is a stable business. Earnings Per Share is Rs24, and the company distributes all of this to its shareholders as dividends. Shareholders of BBA-FB expect a 16% p.a. return on these shares because they can earn 16% p.a. on other similar investments. What is the price at which they will be willing to buy BBA-FB Limited shares?
2. The CEO's son has just finished his education and wants to start a new product line and grow the business. He suggests that the company retain 40% of the earnings to invest in the new product. He believes that the company can earn a return on asset of 25% p.a. on this new product without much risk. Assuming that investors are still satisfied with a 16% p.a. return from BBA-FB shares, what will be the share price on execution of the plan