Good Environment is in the business of converting Bostons sewage sludge into fertilizer. The business is not in itself very profitable. However, to induce Good Environment to remain in business, the Metropolitan District Commission (MDC) has agreed to pay whatever amount is necessary to yield Good Environment a 10% book return on equity. At the end of the year Good Environment is expected plowback 25% of earnings and pay a $6 dividend. The current price of the stock is $120.

a. Now (T0) Good Environment announces that it has secured a contract to treat Cambridge sewage, and this will increase its ROE to 14%. It will need to expand its treatment facilities, and that will require to plowback 85% of its earnings for four years. Starting in year 5, however, it will be able to pay out 70% of earnings; its ROE, nevertheless, will remain at 14%. What will be Good Environments stock price once this announcement is made and its consequences for Good Environment are known?

b. What part of P4 reflects Good Environments present value of growth opportunities (PVGO) after year 4?