8. Consider a rm that is expected to earn $5 per share next year. EPS will continue at this level in perpetuity without any additional investment. Investors require a 10% rate of return. a. What is the price per share and P/e ratio? b. A new investment opportunity arises allowing the rm to plow back exactly $3 per share at the end of each of the next ve years and nothing thereafter. Each investment is expected to earn a level annual return (ROI) of 10% in perpetuity, starting the year after the investment is made. What is the new price per share and P/e ratio? Show that the P/e ratio is the reciprocal of the interest rate in this case. (Note: The growth in this case is linear not geometric so the constant growth model does not apply. Each layer of investment adds 30 to earnings and dividends at the end of the following year. Thus, the $3 investment at t = 1 adds 30 to earnings and dividends at t = 2, etc.) c. Suppose the expected return on investment were 25% instead of 10% in part (b). What would be the new stock price? Show that the P/e ratio is higher than in the previous case. (Note: Each layer of investment adds 75 to earnings and dividends at the end of the following year. Thus, the $3 investment at t = 1 adds 75 to earnings and dividends at t = 2, etc.)