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Consider a firm with existing assets that generate an EPS of $5. If the firm does not invest except to maintain existing assets, EPS is expected to remain constant at $5 a year. However starting next year the firm has the 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 be the stock price at time t=0? Solve the problem using standard valuation method, i. e., stock price equals the present value of future dividends. Set the problem up on spreadsheet. Report the value of the stock for each time period, t=0 to t=6.

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Financial Management, Finance

Category:- Financial Management
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