Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:

Year	0	1	2	3
Sales (Revenues)		100,000	100,000	100,000
- Cost of Goods Sold (50% of Sales)		50,000	50,000	50,000
- Depreciation		30,000	30,000	30,000
= EBIT		20,000	20,000	20,000
- Taxes (35%)		7000	7000	7000
= unlevered net income		13,000	13,000	13,000
+ Depreciation		30,000	30,000	30,000
- capital expenditures	-90,000

The free cash flow for the first year of Epiphany's project is closest to:

a. $43,000

b. $25,000

c. $13,000

d. $45,000

Problems:

Use the following information to answer the question(s) below.

Company	Ticker	Price per Share	Earnings per Share	Book Value per Share
Abbott Labs	ABT	54.35	3.69	13.79
Bristol-Myers-Squibb	BMY	25.45	1.93	7.33
GlaxoSmithKline	GSK	41.3	3.15	6.03
Johnson & Johnson	JNJ	62.6	4.58	18.27
Merck	MRK	36.25	3.81	10.86
Pfizer	PFE	$18.30	$1.20	8.19

1. Assuming that Novartis AG (NVS) has an EPS of $3.35, what is the highest expected stock price for Novartis, based upon the P/E ratios for its competitors?

Problems:

1. What is an efficient portfolio?

2. Explain why the risk premium of a stock does not depend on its diversifiable risk.