(50 points) Your neighbor, who is the CEO of Endless Summer Biotech (ESB), recently discussed some of his firm's current research projects with you while you were playing golf During your conversation you come to find out that ESB has developed a new enzyme, which significantly slows the growth of cancer cell production. ESB is planning on announcing its R&D success next week. At the conclusion of the eighteenth hole, you head to your office to take a closer look at the information available on ESB. After checking the recent news stories on the Internet you realize that there is no publicly available information indicating the information you obtained on the golf course. With this in mind you estimate that the firm will experience extraordinary growth of50% per year for two years, and another three years of unusual growth at 20% per year. After this five year period, you feel competition will cause the firms growth rate to fall to its previous growth pattern of 10% per year. Answer the following questions assuming the firm just paid a dividend of $0.20 per share, the return on the market portfolio is 10%, the risk- free rate is 4% and the Beta for ESB is 1.5 3. a. b. (5 pts) According to the CAPM, calculate the required return for this investment. (25 pts) How much would you be willing to pay for the stock? there are a number of market participants that currently believe that ESB will continue to grow at a constant rate of 10% and have a required return of 14%, explain how this difference of opinion between their beliefs and your beliefs in part b.) will cause trades to occur. Assuming the current market price is $9, describe the trades that will be most likely to occur. [Hint: use the constant growth dividend discount model here.] (10 pts) Assuming the price you found in part b.) is realized two weeks from today and the current market price is $9, what would your holding period rate of return be if you bought 2000 shares of ESB? [hint: no dividend is paid] d. (50 points) Your neighbor, who is the CEO of Endless Summer Biotech (ESB), recently discussed some of his firm's current research projects with you while you were playing golf During your conversation you come to find out that ESB has developed a new enzyme, which significantly slows the growth of cancer cell production. ESB is planning on announcing its R&D success next week. At the conclusion of the eighteenth hole, you head to your office to take a closer look at the information available on ESB. After checking the recent news stories on the Internet you realize that there is no publicly available information indicating the information you obtained on the golf course. With this in mind you estimate that the firm will experience extraordinary growth of50% per year for two years, and another three years of unusual growth at 20% per year. After this five year period, you feel competition will cause the firms growth rate to fall to its previous growth pattern of 10% per year. Answer the following questions assuming the firm just paid a dividend of $0.20 per share, the return on the market portfolio is 10%, the risk- free rate is 4% and the Beta for ESB is 1.5 3. a. b. (5 pts) According to the CAPM, calculate the required return for this investment. (25 pts) How much would you be willing to pay for the stock? there are a number of market participants that currently believe that ESB will continue to grow at a constant rate of 10% and have a required return of 14%, explain how this difference of opinion between their beliefs and your beliefs in part b.) will cause trades to occur. Assuming the current market price is $9, describe the trades that will be most likely to occur. [Hint: use the constant growth dividend discount model here.] (10 pts) Assuming the price you found in part b.) is realized two weeks from today and the current market price is $9, what would your holding period rate of return be if you bought 2000 shares of ESB? [hint: no dividend is paid] d