revised forecast for ROIC that involves a drop to 11% starting in year 5. Question 4In March
Question:
revised forecast for ROIC that involves a drop to 11% starting in year 5. Question 4In March of 2005, Domestic Paper stock sold for $73. Security analysts were forecasting a long-term earnings growth rate of 8.5%. The company was paying dividends of $1.68 per share. a.If dividends are expected to grow along with earnings at g = 8.5% per year in perpetuity, what rate of return (rE) were investors expecting? b.If instead Domestic Paper is expected to earn 12% on book equity (ROE) and to retain 50% of its earnings. Based on these new forecasts and the current $73 price, recalculate gand rEQuestion 5Penn Central Electricity has existing assets that generate $4 in earnings per share. If the firm does not invest except to maintain existing assets, EPS is expected to remain constant at $4 a year. However, Penn Central can start next year with investing $1 per share a year in developing a newly discovered source for electricity generation. Each investment is expected to generate a permanent 25% return. However, the source will be fully developed by the fifth year of investing in it, which means that no more new investments are possible from year 6 onwards. Investors require an 18% rate of return. a.What is the stock price and what is the price-earnings (P/E) ratio? b.What is the new stock price if the firm could continue to invest exactly $1 per year forever?
Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers