Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Compost Science Incorporated (CSI) is in the business of converting Boston's sewage sludge into fertilizer. The business is not in itself very profitable. However, to
Compost Science Incorporated (CSI) is in the business of converting Boston's 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 10% book return on equity. At the end of the year, CSI is expected to pay a $4 dividend. It has been reinvesting 40% of earnings and growing at 4% 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. CSl's plant will, therefore, be expanded gradually over five years. This means that CSI will have to reinvest 80% of its earnings for five years. Starting in year 6 , however, it will again be able to pay out 60% of earnings. What will be CSI's 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.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started