What is present value of growth opportunities

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Sepia Ironworks Inc. is expected to earn $5.0 per share next year (i.e., EPS1 = 5). The company is currently considering an expansion plan that would require all earnings to be retained for the next three years, so that the next cash dividend under the plan would be paid four years from now. Under the plan, growth in earnings is expected to be 16% per year. Upon completion of the plan, Sepia will maintain a 60% payout ratio forever on a ROE of 16%. Assume the company’s stock has a required return of 12%. Answer the following questions.

A. If Sepia goes forward with the plan, what will be the growth rate after the completion of the plan?

B. If Sepia goes forward with the plan, what will be its new stock price?

C. What is the present value of growth opportunities?

Reference no: EM131977953

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