Lava development company has maintained stable earnings of, Ask an Expert

Finance

Lava Development Company has maintained stable earnings of $7 per share, and has also maintained a 100% payout policy. Recently, Lava has decided to start a new line of business to develop luxury housing with scenic views of active volcanoes. The new line will require Lava to change to a policy of retaining 30% of its earnings for the foreseeable future. You estimate that with the new line of business that dividends will grow by 2% per year in perpetuity (after next year). Lava’s current cost of capital is 12%.

a. Calculate the intrinsic value of Lava Development shares?

b. Calculate Lava’s net present value of growth opportunities?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92677244

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