Question
Green Corps current book return on equity is 10%. Next year, Green Corp is expected to pay a 5 dividend. It has been reinvesting 50%
Green Corps current book return on equity is 10%. Next year, Green Corp is expected to pay a 5 dividend. It has been reinvesting 50% of earnings each year.
Suppose Green Corp continues on this growth trend. What is the expected long- run rate of return from purchasing the stock at 120? What part of the 120 price is attributable to the present value of growth opportunities? Explain your calculations carefully.
Now the company announces an expansion plan which requires the company to reinvest 90% of its earnings for three years. Starting in year 4, however, it will again be able to pay out 50% of earnings. What will be Green Corps stock price once this announcement is made and its consequences for the company are known? Explain your calculations carefully.
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