You are managing the portfolio of a client who has invested 100% of his money in Tesla stock,

which has an expected return of 5% and a volatility of 12%. The risk-free rate is 2% and the

market portfolio has an expected return of 6% and a volatility of 10%. Assume that the capital

asset pricing model assumptions hold and that the beta of Tesla is equal to 1.1.

Describe the dividend discount model. Explain how to perform stock valuation in the

presence of:

i. share repurchases;

ii. debt.