1. 1. Baltic Company’s shares have a book value of $12 and a market price of $20. It is expected that the company’s book value would grow at 5% per year indefinitely. If its cost of equity capital is 15% per year, what is the market’s assessment of its steady state return on equity? (6 marks)
2. 2. The Boston Oil Company decides to acquire an electronics company for $60 per share, a 50% premium over current market price. The CFO of Boston Oil Company argues that this move would create value for its own shareholders because it can use its excess cash flows from the oil business to help finance growth in the new electronics segment.

Do you think that the Boston Oil Company’s shareholders would be better served if its management acquires the electronics company rather than paying out the excess cash as dividends? Justify your answer. (6 marks)