Compost Science Incorporated (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 12% book return on equity. At the end of the year, CSI is expected to pay a $5 dividend. It has been reinvesting 30% of earnings and growing at 3% a year. a-1. Suppose CSI continues on this growth trend. What is the expected long-run rate of return from purchasing the stock at $100? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number. a-2. What part of the $100 price is attributable to the present value of growth opportunities? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. Now the MDC announces a plan for CSI to treat Cambridge sewage. CSI's plant will, therefore, be expanded gradually over five years. This means that CSI will have to reinvest 60% of its earnings for five years. Starting in year 6, however, it will again be able to pay out 70% of earnings. What will be CSI's stock price once this announcement is made and its consequences for CSI are known? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. a-1. Rate of return a-2. PVGO b. Stock price %
Compost Science Incorporated (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 12% book return on equity. At the end of the year, CSI is expected to pay a $5 dividend. It has been reinvesting 30% of earnings and growing at 3% a year. a-1. Suppose CSI continues on this growth trend. What is the expected long-run rate of return from purchasing the stock at $100? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number. a-2. What part of the $100 price is attributable to the present value of growth opportunities? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. Now the MDC announces a plan for CSI to treat Cambridge sewage. CSI's plant will, therefore, be expanded gradually over five years. This means that CSI will have to reinvest 60% of its earnings for five years. Starting in year 6, however, it will again be able to pay out 70% of earnings. What will be CSI's stock price once this announcement is made and its consequences for CSI are known? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. a-1. Rate of return a-2. PVGO b. Stock price %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Compost Science Incorporated (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 12% book return on equity. At the end of the year, CSI is
expected to pay a $5 dividend. It has been reinvesting 30% of earnings and growing at 3% a year.
a-1. Suppose CSI continues on this growth trend. What is the expected long-run rate of return from purchasing the stock
at $100?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number.
a-2. What part of the $100 price is attributable to the present value of growth opportunities?
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
b. Now the MDC announces a plan for CSI to treat Cambridge sewage. CSI's plant will, therefore, be expanded gradually
over five years. This means that CSI will have to reinvest 60% of its earnings for five years. Starting in year 6, however, it
will again be able to pay out 70% of earnings. What will be CSI's stock price once this announcement is made and its
consequences for CSI are known?
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
a-1. Rate of return
a-2. PVGO
b. Stock price
%
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