There is firm A that will pay dividends $100 next year if the economy is strong and $50 if the economy is weak. The economy will be strong with probability 50%. The market premium is 7%. The risk-free rate is 5%. The market return will be 21% when the economy is strong and 3% when the economy is weak. The beta of firm A is 0.9. The firm has no leverage 1. a. b. c. Calculate the required expected return for firm A's equity. Calculate the present value of firm A's equity Suppose firm A will pay dividends $200 if the economy is strong and $100 if the economy is weak. Firm A's beta will remain the same? How about the present value of firm A's equity? There is another firm, called firm B, whose dividend payments next year will be $102 if the economy is strong and $52 if the economy is weak. The beta of firm B is 0.95. Firm B has no Jeverage, either. Calculate the required expected return for firm B's equity. Calculate the present value of firm B's equity. d. e. There is a third-type of firm, called firm C, whose dividend payments next year will be $102 if the economy is strong and fire does not break out in its factory, $82 if the economy is strong but fire breaks out in its factory, $52 if the economy is weak and fire does not break out, and $32 if the economy is weak but fire breaks out. Fire will break out with probability 10% but this fire risk is firm-specific risk, which will occur independently of the fundamental state of the economy. Firm C has no leverage. Now, suppose there are 1M firms which have the same payoff structure as that of firm C That is, they will pay $102 when the economy is strong and $52 when the economy is weak. But when fire breaks out, the dividends will decrease by $20. Again, fire risk is firm-specific risk. All these firms have no leverage, either. In this circumstance, suppose you hold 1/1M unit of the share of each of these companies f. How much do you expect to get in total when the economy is strong and when the economy is weak, respectively? Calculate the beta and required expected return for firm C's equity g