Reinhardt Industries is a mature company experiencing a constant growth rate of 4.5%.  The firm has just paid a dividend of $3.60 (that is, D0 = $3.60).  Investors require an 11% rate of return on the stock.  What is the firm’s stock price today?  NOTE: Since the $3.60 dividend has already been paid, its value should not be reflected in the firm’s stock price.  

Stocks E and S each have an expected return of 11%, a beta of 1.0, and a standard deviation of 20%.  The risk-free rate of return (rRF) is 4%.  Assume that the market is in equilibrium.  The returns on the two stocks have a correlation of 0.75.  Portfolio P has 35% in Stock E and 65% in Stock S.  Which of the following statements is CORRECT?

In today’s market, you observe the following yield curve for government securities: Assume that the pure expectations hypothesis holds (i.e., the maturity risk premium = 0).  What does the market expect will be the interest rate on 2-year securities three years from now?  You may solve this problem using either the algebraic or geometric approach.

Jamison Foods is considering the introduction of a new candy bar line.  The project would require a $4.75 million after-tax investment outlay today (t = 0).  The after-tax cash flows would depend on whether the new candy bar is well received by consumers.  There is a 60% chance that demand will be good, in which case the project will produce after-tax cash flows of $3.00 million at the end of each of the next 3 years.  There is a 40% chance that demand will be poor, in which case the after-tax cash flows will be $0.25 million for 3 years.  The project has a WACC of 12%.  The firm will know if the project is successful after receiving the cash flows the first year, and after receiving the first year’s cash flows it will have the option to abandon the project.  If the firm decides to abandon the project the company will not receive any operating cash flows after t = 1, but it will be able to sell the assets related to the project for $2.75 million after taxes at t = 1.  Assuming the company has an option to abandon the project, what is the expected NPV (in millions of dollars) of the project today?  

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