Renewals Ltd. is a firm with existing assets that generate an earnings per share of $5.00. If the firm does not invest except to maintain existing assets, the earnings per share are expected to remain constant at $5.00 per year. However, starting next year the firm has the chance to invest $3.00 per share a year developing a newly discovered geothermal steam source of electricity generation. These investments are expected to generate a permanent 20% return per year. However, the source will be fully developed by the fifth year.

a) Calculate the stock price assuming investors require a 12% rate of return.

b) Show that the earnings/price ratio is .20 if the required rate of return is 20%.