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Greene Energy Inc (GE) expects to report earnings of $5.00 a share at the end of the next fiscal year (on February 17, 2013). GE plans to retain 100 percent of earnings at the end of each of the next 4 years to finance the firm's expansion. The CEO expects that the yearly  ROE on the earnings reinvested in the firm will be 35 percent over the next four years. However, beginning with date 5 (at the end of year five) the ROE for the firm's new investments is expected to fall to 15 percent, causing the firm to initiate a shareholder dividend financed by reducing the retention rate to 40 percent of earnings. The CEO anticipates that this level of reinvestment can be sustained in perpetuity. Assuming the required return on GE's stock is 16 percent, determine the GE's current share price and describe whether GE's price to earnings ratio will increase or decrease over the next five years.

Basic Finance, Finance

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