What the new share price and the value of the growth option

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Reference no: EM132796190

Question - Space Solutions plc expects to have earnings per share of $4 in the coming year. Rather than reinvesting these earnings and grow, the firm plans to pay out all of its earnings as a dividend. With the expectation of no growth, Space Solutions' current share price is $40. Suppose Space Solutions could cut its dividend pay-out rate to 75% for the foreseeable future and use the retained earnings to open new office space. The return on new investment is expected to be 12% p.a. If we assume that the risk of these new investments is the same as the risk of its existing investments, then the firm's equity cost of capital is unchanged. What the new share price and the value of the growth option if Space Solutions pursues this investment opportunity.

Reference no: EM132796190

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