Your privately-held firm specializes in pharmaceuticals (division P) and medical equipment (division Q). Your firm has an exclusive contract to sell pharmaceuticals and medical equipment to hospitals on the west coast for the next 15 years. After that, your firm will be sold to a large publicly-traded medical firm. A private equity firm wants to purchase an equity position in your firm. The purpose of this question is to determine the riskiness of this hypothetical equity position for the private equity firm.

a. An analysis of other pharmaceuticals firms suggests that the beta of pharmaceuticals equals 1.9. Assume that the risk-free rate equals 3 percent, and that the market risk premium equals 5 percent. What is the expected return for your pharmaceuticals division?(2 points)

b. Your pharmaceuticals division is expected to produce a net cash flow of $20M per year for the next 15 years. The division will also be sold for $80M at t=15 when the contract ends. What is the value of the pharmaceuticals division?(6 points)

c. The medical equipment division has a value of $80M at t=0 and a beta of 0.9. What is the beta of assets for your firm?(6 points)

d. Your firm has $60M in debt outstanding. The debt is assumed to have a beta of 0.10. What is the beta of equity for your firm? Given this beta of equity, what is the expected return on equity for your firm? (6 points)