Suppose we observe that B0, the book value per share for Firm 1 is $8, that E1, the earning per share for next period is expected to be $2, and that R1, the revenue per share for next period is expected to be $12. The price of the stock of Firm 1 is $50. Similarly, for Firm 2 the book value per share is $10, the earning per share for next period is expected to be $1.5, and the revenue per share for next period is expected to be $15. The price of the stock of Firm 2 is $52. Finally, for Firm 3 the book value per share is $16, the earning per share for next period is expected to be $4, and the revenue per share for next period is expected to be $72. The price of the stock of Firm 3 is $108.You are asked to price Firm 4, which has a book value per share of $12, next period earnings per share of $2, and next period revenue per share of $10. (7 points each for a total of 14 points)

(i).Work out qBV, qE, and qR, the shadow price on each dollar of book value, earnings, and revenues implicit in the observed market price of Firm 1, Firm 2, and Firm 3, and work out the price of Firm 4 from these shadow prices.

(ii).Work out the composition of the portfolio of the stocks of Firm 1, Firm 2, and Firm 3 that replicates the book value, earnings, and revenues of Firm 4, and price the stock of Firm 4 on the basis of this replicating portfolio.