The business of converting boston''s sewage sludge

Reference no: EM13295764

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% book return on equity. At the end of the year CSI is expected to pay a $4.70 dividend. It has been reinvesting 30% of earnings and growing at 3% a year.
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 77% 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?

Reference no: EM13295764

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