Compost Science Inc. (CSI) is in the business of converting Bostons sewage sludge into fertilizer....
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Finance
Compost Science Inc. (CSI) is in the business of converting Bostons 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 13% book return on equity. At the end of the year, CSI is expected to pay a $4 dividend. It has been reinvesting 30% of earnings and growing at 5% a year.
The stock price is $25.
Now the MDC announces a plan for CSI to treat Cambridge sewage. CSIs plant will, therefore, be expanded gradually over five years. This means that CSI will have to reinvest 90% of its earnings for five years. Starting in year 6, however, it will again be able to pay out 70% of earnings.
Question. What will be CSIs stock price once this announcement is made and its consequences for CSI are known?
(Choose the option closest to your answer)
Multiple Choice
The stock price should be about $20
The stock price should be about $22
The stock price should be about $18
The stock price should be about $16
The stock price should be about $14
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