FIN 350 Business Finance Professor Balkanska Problem Set Questions: Robert Balik and Carol Kiefer are senior vice presidents of the Mutual of Chicago Insurance Company. They are codirectors of the company's pension fund management division, with Balik having responsibility for fixed-income securities (primarily bonds) and Kiefer being responsible for equity investments. A major new client, the California League of Cities, has requested that Mutual of Chicago present an investment seminar to the mayors of the represented cities, and Balik and Kiefer, who will make the actual presentation, have asked you to help them. To illustrate the common stock valuation process, Balik and Kiefer have asked you to analyze the Bon Temps Company, an employment agency that supplies word-processor operators and computer programmers to businesses with temporarily heavy workloads. You are to answer the following questions. Assume that Bon Temps has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 3%, and that the required rate of return on the market is 8%. What is Bon Temps's required rate of return? (Hint: Calculate the market risk premium as the required return on the market minus the risk free rate.) Assume that Bon Temps is a constant growth company whose last dividend (Do, which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a 4% rate. What is its current stock price? What would the stock price be if its dividends were expected to have zero growth? Now assume that Bon Temps's dividend is expected to grow 30% the first year, 20% the second year, 10% the third year, and return to its long-run constant growth rate of 4%. What is the stock's value under these conditions