Present value of discounted future dividend stream

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Reference no: EM13846938

Consider a firm with existing assets that generate an EPS of $5. If the firm does not invest except to maintain existing asset, EPS is expected to remain constant at $5 a year. However starting next year the firm has a chance to invest $3 per share a year in developing a newly discovered geothermal steam source for electricity generation. Each investment is expected to generate a permanent 20% return and discount rate is 12%. However, the source will be fully developed by the fifth year. What will the stock price at time 0? Solve the problem using standard valuation method, i.e. stock price equals the present value of discounted future dividend stream

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Reference no: EM13846938

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