You have $10,000,000 in a portfolio consisting of 4 stocks with $2,500,000 invested in each.  The portfolio’s beta is 1.50.  You plan to sell Stock A in your portfolio and use the proceeds to buy Stock B.  Stock A has a beta of 1.25, while Stock B’s beta is 0.75.  After this transaction, what will the portfolio’s new beta be? (Hint:  Make sure to carry out your calculation to 4 decimal places.)  

You have been assigned the task of using the corporate, or free cash flow, model to estimate Matthias Corporation’s intrinsic value.  The firm’s WACC is 12%, its end-of-year free cash flow (FCF1) is expected to be $525 million, and the FCFs are expected to grow at an 18% rate for each of the next two years (t = 2 and 3).  After t = 3, the free cash flows are expected to grow forever at a constant rate of 5% per year.  The firm has $330 million of nonoperating assets.  The company has $317.71 million in long-term debt, no preferred stock, and it has 150 million shares of common stock outstanding.  What is the firm’s estimated intrinsic value per share of common stock?

In today’s market, you observe the following yield curve for government securities: Assume that the pure expectations hypothesis holds (i.e., the maturity risk premium = 0).  What does the market expect will be the interest rate on 2-year securities three years from now?  You may solve this problem using either the algebraic or geometric approach.

Reinhardt Industries is a mature company experiencing a constant growth rate of 4.5%.  The firm has just paid a dividend of $3.60 (that is, D0 = $3.60).  Investors require an 11% rate of return on the stock.  What is the firm’s stock price today?  NOTE: Since the $3.60 dividend has already been paid, its value should not be reflected in the firm’s stock price.  

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