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Lava Development Company has maintained stable earnings of $7 pershare, and has also maintained a 100% payout policy. Recently, Lava has decided to start a
Lava Development Company has maintained stable earnings of $7 pershare, and has also maintained a 100% payout policy. Recently, Lava has decided to start a new lin of business to develop luxury housing with scenic views of active volcanoes. The new line will require Lava to change to a policy ofretaining 30% of its earnings for the foreseeable future. You estimate that with the new line ofbusiness that.. dividends will grow by 2% per year in perpetuity (after next year. Lava's current cost ofcapital is 12%. a. Calculate the intrinsic value of Lava Development shares? b. Calculate Lava's net present value of growth opportunities
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