a) You are the owner of a firm that currently generates revenues of 1 million per year. Next year, revenues will either decrease by 8% with 60% probability or increase by 10% with 40% probability and then stay at that level for as long as you run the business. You own the firm outright. Also, you have annual costs of 700,000. If you decide to shut down the firm the cost is zero. In that case, you can always sell the firm for 600,000. What is the business worth today if the cost of capital is 12%? [15 marks]

b) Zweite Pharma is a fast-growing company. The company forecasts that in the next three years its growth rates will be 30%, 28% and 24% respectively. After three years, the company expects a more stable growth of 8% that will last forever. Last week it declared a dividend of 1.67. The required rate of return is 14%.

i) Compute the dividends for the next three years and find their present value.

ii) Calculate the price of the shares at the end of year 3 when the firm settles to a constant growth.

iii) What is the current price of the shares?