Question 2 Discuss three factors, according to Miller & Modigliani (1961) theorem, that impact on firm value arising from the level of dividends that may be paid by a company. (25 marks) Question 2B Samantha currently owns a diversified portfolio worth $800,000. She intends to increase her investment by $200,000 and is considering Hill Corporation's stock. Her financial advisor provided her with some financial information given below. Assume risk free rate of 2% and market risk premium of 5%. Beta Expected Return 9.0% 1.40 Original Portfolio Hill Corporation 11.2% 1.80 Required: i. According to Capital Asset Pricing Model (CAPM), what is the required return on the Hill Corporation's stock? Would you recommend Samantha to invest in the stock of Hill Corporation? (10 marks) ii. Calculate the expected return and beta of the new portfolio if Samantha invests in Hill's stock. Evaluate the risk-return performance of the new portfolio Question 1A A company intends to upgrade its machine for a 10-year project, which just passed its sixth year. The new machine is of higher precision which is estimated to reduce defect costs of $80,000 per year and warranty claims by customers by $100,000 per year for the remaining life of the project. The applicable corporate tax rate is 17% and the cost of capital for similar risk projects is 15 percent. More details on the existing and new machines are available: Existing Machine $1,000,000 Straight line $500,000 $0 New Machine $700,000 Straight line Depreciable sum Depreciation method Current salvage value Salvage value in 4 years' time Maintenance fee $ 100,000 Year 2: $40,000 $0 Required: i. Compute the incremental net present value of for the new machine. (25 marks) ii. Should the new machine be purchased? (5 marks) (sub-total 30 marks)