a) Bronze plc currently pays a 2 per share dividend. The dividend is expected to grow at a 20 percent annual rate over the next three years and then to grow at 6 percent for the foreseeable future. What would you pay for a share of this stock if you demand a 20 percent rate of return?

b) Stone plc is financed entirely with equity. The beta for Stone plc has been estimated to be 1.0. The current risk-free rate is 10 percent and the expected market return is 15 percent.

(i) What rate of return should Stone plc require on a project of average risk?

(ii) If a new venture is expected to have a beta of 1.6, what rate of return should Stone plc demand on this project?

(iii) The project in question requires an initial outlay of 9 million and is expected to generate a 10-year stream of annual cash flows of 1.9 million. Calculate the NPV of the project using Stone plc's required rate of return for projects of average risk.

(iv) Calculate the NPV of the project using the risk-adjusted rate computed in part (ii).

(v) Comment on the difference (if any) on the decision to invest using the two different rates.