The Rice Solar Corp. has a new investment opportunity that generates expected cash

flows of $80 million per year (end of year) forever. The managers of Rice Solar are not

sure what the required rate of return for the project should be, so they examine A&M

Solar Inc. whose main business is very similar to the new project Rice Solar is

evaluating. The expected return of the market portfolio is 8%, and the annual risk-free

rate is 2%. The volatility of the market portfolio is 20%, and the covariance between the

market portfolio and A&M Solar Inc. is 0.3. Assume that tax rates are equal to zero;

A&M Solar and Rice Solar have no debt.

a. What is the of the assets of A&M Solar Inc.?

b. What is the expected return of A&M Solar Inc.?

c. What is the present value of the cash flows of the new investment opportunity of

Rice Solar Corp?

d. If the project requires an investment of $500 million, should Rice Solar go ahead

with it? Why?