Company Qs current return on equity (ROE) is 20%. It currently pays out earnings as cash dividends using a payout ratio of 0.5. Current book value per share, i.e. at the start of year 1, is $50. Book value per share will grow as Q reinvests earnings.

Assume that the ROE and payout ratio stay constant at their current levels for the next three years. After that, i.e. starting in year 4 and going on forever thereafter, competition forces ROE down to 10% and the payout ratio increases to 0.8. The cost of capital is 10%.

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.)

Year	EPS	Dividends
1	$	$
2	$	$
3	$	$
4	$	$
5	$	$

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

Stock worth per share

$

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 15% book return on equity. At the end of the year CSI is expected to pay a $5 dividend. It has been reinvesting 40% of earnings and growing at 6% 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? (Do not round intermediate calculations. Round your answer to nearest whole percent.)

Rate of return

%

a-2.	What part of the $100 price is attributable to the present value of growth opportunities? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

PVGO

$

b.

Now the MDC announces a plan for CSI to treat Cambridge sewage. CSIs plant will, therefore, be expanded gradually over three years. This means that CSI will have to reinvest 70% of its earnings for three years. Starting in year 4, however, it will again be able to pay out 60% 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 answer to 2 decimal places.)

Stock price

$