1. Suppose we are considering investing in a stock priced as $ 55 per share today. We know that it will bring $ 1 dividend every year and can be sold out as $ 65 per share 5 years later. Assume the interest rate is constant at 5% every year.

Calculate the present value of the stock, is this stock overvalued or undervalued? Show your work

2. Suppose GM has a new project that would cost $11 million today and yield a payoff of $20 million in 6 years.

a. should GM undertake the project if the interest rate is 11 percent? 10 percent? 9 percent? 8 percent?

b. Can you figure out the exact cutoff for the interest rate between profitability and non-profitability of this project?

III. SHORT ESSAY. Answer the following question briefly but concisely.

1. List three different ways that a risk-averse person can reduce financial risk.