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What is the expected long-run rate of return

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Question - 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 12% book return on equity. At the end of the year, CSI is expected to pay a $5 dividend. It has been reinvesting 30% of earnings and growing at 3% a year.

Required -

a-1. Suppose CSI continues on this growth trend. What is the expected long-run rate of return from purchasing the stock at $100?

a-2. What part of the $100 price is attributable to the present value of growth opportunities?

Reference no: EM133127431

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