Question
Broke Brothers, Inc. business earns a 15% return on equity and has reinvested 40% of earnings. At the end of the year it is expected
Broke Brothers, Inc. business earns a 15% return on equity and has reinvested 40% of earnings. At the end of the year it is expected to pay a $6 dividend. a. The stock is valued at $115. What part of the price is attributable to the present value of growth opportunities? (5 POINTS)
b. Now suppose (at t=0) the company has won a major contract that will require heavy investments to finance its expansion. It will have to reinvest 90% of its earnings for the next three years. Starting in year 4, however, it will again be able revert back to the present level of earnings plowback of 40%. What will be the company stock price once this announcement is made? (20 POINTS)
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