Biocom is a pharmaceutical company that currently has earnings of $100 million per year before interest and taxes. These earnings are expected to continue for the next five years. After five years, one of Biocom's drug patents will expire and its annual earnings arc expected to drop to $50 million in the sixth year. Earnings are expected to continue at this level in perpetuity. The market value of Biocom's total debt is S5OO million and it pays 8% annual interest on this debt. It has 10 million shares outstanding and its equity is currently valued at $15.23 per share. Biocom's annual stock returns have a CAPM beta of 1.25 and a variance of 0.862. Suppose that the assumptions of the CAPM hold and that individuals can borrow at the same rate as corporations. The expected return on the market portfolio of risky assets is 0.13 and the risk free rate of interest is 0.05. The corporate tax rate is 35%. Compute the expected annual return on Biocom stock. Would a rational investor hold Biocom stock as a part of her portfolio? Suppose that Biocom has the opportunity to develop a new cancer drug. This would require an immediate cash outlay of $4(K) million, which it plans to raise by issuing new stock. Biocom expects to get a patent for the new drug beginning five years from today and lasting for ten years. In each of those ten years Biocom expects the new drug to generate earnings of $150 million before taxes. After that, the drug will be worth nothing and it will generate no further earnings. Suppose that the risk of this project is the same as the current risk of Biocom as a whole. Should Biocom go ahead and develop the new drug? In part (3), you assumed that Biocom would finance its new project by issuing new stock. Would this stock be issued at a price equal to. less than or greater than the current stock price of SI 5.23? In part (3), you assumed that Biocom would finance its new project by issuing new stock. What will Biocom's weighted average cost of capital be after this stock issue? In part (3), you assumed that Biocom would finance its new project by issuing new stock. If you were the CI O of Biocom. how would you finance the project? (Include a one-sentence justification on the answer sheet and a more detailed explanation on your attached work.)