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 13% book return on equity. At the end of the year, CSI is expected to pay a $4 dividend. It has been reinvesting 30% of earnings and growing at 5% 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. Enter your answer as a percent rounded to the nearest whole number.)

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.)

b. Now the MDC announces a plan for CSI to treat Cambridge sewage. CSIs plant will, therefore, be expanded gradually over five years. This means that CSI will have to reinvest 60% of its earnings for five years. Starting in year 6, however, it will again be able to pay out 70% 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.)

Portfolio managers are frequently paid a proportion of the funds under management. Suppose you manage a $106 million equity portfolio offering a dividend yield (DIV₁/ P₀) of 5.6%. Dividends and portfolio value are expected to grow at a constant rate. Your annual fee for managing this portfolio is 0.56% of portfolio value and is calculated at the end of each year. a. Assuming that you will continue to manage the portfolio from now to eternity, what is the present value of the management contract? (Enter your answer in millions rounded to 1 decimal places.)

b. What would the contract value be if you invested in stocks with a 4.6% yield? (Enter your answer in millions rounded to 2 decimal places.)