Business, 23.06.2021 16:30 smonahan2023
Nonconstant Growth. 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% return on investment. At the end of the year, CSI is expected to pay a $4 dividend. It has been reinvesting 40% of earnings and growing at4% a year. a. Suppose CSI continues on this growth trend. What is the expected rate of return for an investor who purchases the stock at the market price of $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 also treat Cambridge sewage. CSI’s plant will therefore be expanded gradually over 5 years. This means that CSI will have to reinvest 80%of its earnings for 5 years. Starting in year 6, however, it will again be able to pay out 60%of earnings. What will be CSI’
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Nonconstant Growth. Compost Science Inc. (CSI) is in the business of converting Boston’s sewage slud...
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