1) Green Devil Corporation stock, of which you own 100 shares, will pay a $2 per share dividend one year from today.Two years from now Green Devil will close its doors and stockholders will receive a liquidating dividend of $11 per share.The required rate of return on Green Devil stock is 10 percent.

(a) What is the current price of Green Devil stock?

(b) If you prefer to receive $5 per share dividend (total $500 cash) one year from today, how can you receive the desired amount of cash flow?Explain your strategy.

(c) If you prefer to receive equal amounts of money in each of the next two years, how can you accomplish this? Explain your strategy.

2) A firm's existing assets either have a high value of $500 million (undervalued) or a low value of $200 million (overvalued).The firm's manager knows the value of her firm's assets, but the market does not.The market assesses that there is a 50% chance the firm has high value assets and a 50% chance the firm has low value assets.Regardless of the value of the firm's existing assets, the manager and the market are both aware that the firm has the opportunity to invest $60 million in a new project that will generate a cash flow of $100 million.The firm currently has 8,000,000 shares outstanding.The firm does not have the internal cash to fund the project, and thus if they want to fund the project they must conduct an equity issue immediately.In the long-run (i.e., next year) the markets will learn whether the firm was the undervalued or overvalued.Assume that managers act to maximize the long-run value of existing shareholder's claims (i.e., the long-run stock price) when making the equity issue/investment decision.The discount rates for cash flows and tax rates are assumed to be zero.

If the market believes that only overvalued firms issue equity, calculate the price at which shares will be sold to raise funds for the new investment project.