Problem:
Orange County Health, a health service company, is expected to generate $1 in earnings per share next year and in the years to follow, from its existing assets. It plans to announce a new program to expand its business. This new program will increase its plow back ratio from zero to 50% next year. The return on equity for the new investments will be 12%. The expansion is expected to continue forever at the same rate. The cost of capital is 10%.
(a) What is the expected dividend next year and its future growth under the new program?
(b) What is the change in Orange County Health's stock price in response the announcement?
(c) Is Orange County Health a growth company? What is its P/E ratio before and after the announcement?