1. In 2019, Firm X had an EBITDA of $200 million, depreciation expenses of $70 million, interest expenses of $60 million and capital expenditures of $35 million. Inventories, accounts receivable and accounts payable at the end of 2018 and at the end of 2019 were as follows:

	12/31/2018	12/31/2019
Inventories	45	35
Accounts Receivable	39	25
Accounts Payable	50	60

a) The corporate tax rate is 20%. What was the firms unlevered cash flow in 2019?

b) The Dunley Corp. plans to issue 5-year bonds. It believes the bonds will have a BBB rating. BBB bonds have a default probability of 0.6%, a 70% expected loss rate in the event of default and a beta of 0.08. Suppose AAA bonds with the same maturity have a 3% yield, assumed to be risk-free. The market risk premium is 9%. Estimate the yield Dunley will have to promise its investors. What spread over AAA bonds will it have to pay?

1. c ) You have the following information about the S&P500 index:

   • Expected dividend yield for the next year (/): 1.5%

   • Expected perpetual dividend growth rate: 4.25%.

     The S&P500 index is a proxy for the market portfolio, so we assume that the return on the market portfolio is equal to the return on the S&P500.

     What is the expected return on the market portfolio implied by the Gordon model?