1. (4+2+2=8)

1. You are a consultant to a large manufacturing corporation that is considering a project with the following net after-tax cash flows (in millions of dollars):

Year 0: -40

Years 1-10 +15/year

The projects beta is 1.8. Assuming that r_f = 8% and E(r_M ) = 16%.What is the highest possible beta estimate for the project before its NPV becomes negative?

2. Assume that the risk-free rate of interest is 6% and the expected rate of return on the market is 16%. A share of stock sells for $50 today. It will pay a dividend of $6 per share at the end of the year. Its beta is 1.2. What do investors expect the stock to sell for at the end of the year?

3. Assume that the risk-free rate of interest is 6% and the expected rate of return on the market is 16%. A stock has an expected rate of return of 4%. What is its beta? Why would anyone consider buying this risky asset which provides an expected return less than the risk-free rate?