Please briefly address each of the following questions. For questions that involve calculations, you may submit your answer in an Excel file that neatly lays out your computations. Please use submit a single Excel Workbook with different worksheets for different questions as needed. Please add space to this document as needed for written answers. 1. Lets say that HCI, Inc. is a firm whose ticket stack is 100% equity. Investors expect that HCIs Sales will be as follows: Years from Now: 1 2 3 4 5 Thereafter Sales: 1,700 1,819 1,910 1,996 2,116 3% growth The capital market expects that beyond five years, HCI will have a growth rate of 3% forever. Investors also expect that HCIs COGS will be about $0.70 per dollar of revenue and HCIs SG&A will be about 15 percent of sales. HCI expects no net investment in either working capital or fixed assets. HCI has a beta of 1.2. The risk free rate is 5% and the Market Risk Premium is 5%. a. Suppose that HCI has 100 shares of common equity outstanding. What is the value of HCI? What is the price per share of HCI? b. Maggie, the CEO of HCI is thinking of increasing the number of shares of HCI common stock to 1,000. She will do this by issuing 10 more shares for every existing share of common stock. She argues that this will reward her investors for their faith in her leadership of the company. What will the value of HCI be after the increase in shares? What will the price per share be? c. Does the issuance of the new shares reward HCIs investors in any sense? d. Suppose again that HCI has 100 shares of common stock. Suppose that Maggie, the CEO, owns 10 of the 100 shares. The rest (90 shares) is owned by investors in the capital market. Now, lets say Maggie issues herself 990 new shares in HCI, but

issues no shares to the other investors. The total number of shares outstanding will then be 1,090. How much is Maggies stake in the firm before the issuance? How much is Maggies stake worth after the issuance? How will the other shareholders react? 2. MXPLC, Inc. and Wham! Groceries have the same firm value of $250M, yet their stock prices are different. Please give two reasons why two firms might have the same value and different stock prices (Hint: equity isnt the only type of ticket). 3. Volatile, Inc. has expected future FCF next year of $200. The capital market currently expects that Volatile, Inc. will have a growth rate of 4.5% forever into the future. Volatile has a beta of 0.11 and 1,000 shares of common equity. Volatile has no debt. The market risk premium is 5% and the risk-free rate is 5%. a. What is Volatile, Inc. price per share? b. Suppose that tomorrow, the market adjusts its growth rate to 4.0%. What will Volatiles price per share be? c. Suppose you hear someone on CNBC screaming about how big stock price changes must be evidence of investor irrationality. How would you explain to someone why Volatiles price changed by so much when its growth rate only changed by one-half a percentage point?