6. (12 marks) Dividend Discount Model (DDM) a. Welch Corporation just paid its annual dividend of $2.00 per share. The firm is expected to grow at a rate of 15 percent for the next three years and then at 6 percent per year thereafter. The required return of Welch Corp. is 12%. What is the expected price of the stock in one year? (6 marks) b. A main assumption of the DDM is that dividends grow at a constant rate indefinitely, which is clearly not true in the real world. Does it make it a not-so-useful model? Explain why or why not. (6 marks) 7. (8 marks) Capital Asset Pricing Model (CAPM) a. What is the beta coefficient of a stock and what does it tell us about the risk premium of that stock? (5 marks) b. Mario has a portfolio that consists of $100,000 invested in stock A which has a beta of 0.8, $150,000 invested in stock B which has a beta of 1.2, and $50,000 invested in stock C which has a beta of 1.8. What is the portfolio beta according to CAPM ? (3 marks) 8. (12 marks) Mega Movies Inc. is considering investing in a movie project. The expected cash flows of the project are given in the table below. Year 0 2 3 4 Cash Flow -$120,000 $65,000 $45,000 $25,000 $15,000 The required return of the project is 12 percent. a. What is the NPV of this project? (4 marks) b. What is the discounted payback period of this project? (4 marks) c. Should the firm accept this project? Explain why or why not (4 marks). 9. (12 marks) Diversification and Portfolio Choice