Maurice Tutor

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    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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  • Professor
    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 22 Feb 2018 My Price 7.00

Compost Science, Inc

Nonconstant G r o wth. Compost Science, Inc. (CSI), is in the business of converting Boston’s sewage sludge into fertilizer. The business is not in itself very profitable. However, to induce CSI to remain in business, the Metropolitan District Commission (MDC) has agreed to pay whatever amount is necessary to yield CSI a 10 percent return on investment. At the end of the year, CSI is expected to pay a $4 dividend. It has been reinvesting 40 per- cent of earnings and growing at 4 percent a year.

a. Suppose CSI continues on this growth trend. What is the expected rate of return from purchasing the stock at $100?

b. What part of the $100 price is attributable to the present value of growth opportunities? c. Now the MDC announces a plan for CSI to treat Cambridge sewage. CSI’s plant will therefore be expanded gradually over 5 years. This means that CSI will have to reinvest

80 percent of its earnings for 5 years. Starting in Year 6, however, it will again be able to pay out 60 percent of earnings. What will be CSI’s stock price once this announcement is made and its consequences for CSI are known?

 

 


Answers

Maurice Tutor
(5)
Status NEW Posted 22 Feb 2018 10:02 PM My Price 7.00

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