Company y has market beta of = 0.6, and the real risk-free rate and the

inflation are 1.5% and 1%, respectively. The market risk premium is 8%.

a. If the companys return on equity is 5%, what would you recommend

to the CEO regarding reinvestment? Why?

b. The company plans the following dividend strategy unil year 4 after

which the dividends will deacrease by 2% each year forever. Calculate the

fair price of each share.

Year 1 Year 2 Year 3 Year 4

Dividend=$0 Dividend=$2 Dividend=$4 Dividend=$22.4

c. The company belongs to an industy with price to earning ratio of 33.

As a financial analyst, what would you recommend to your clients?