Part III: Problem Solving 1. (Security analysis) Answer the following questions regarding security analysis (20%) 1) The firm AB has an original equity of 50 million$, the number of shares is 25 million. The net income after tax was 5 million by the end of last year. The firm kept 2 million for future development and issued the rest 3 million to shareholders. The same retention ratio is going to be applied in future. What are the retention ratio b, ROE, the growth rate g, and the earnings per share E? (5%) 2) The market portfolio's expected return is 8%; risk free rate is 4%; the firm AB's beta is 1.5, then what is the current stock value? (5%) 3) Suppose right now the firm makes an announcement to increase retention ratio to 60%. The same retention ratio is going to be applied in future. Is this a piece of good news to stockholders? Why? (5%) 4) Suppose firm AB experiences a R&D failure, which drags the firm's ROE down to 8%. The retention ratio is 40%. Variables in question 2) are unchanged. Assuming you are a CFO of another listed firm B, your boss asks you to take over firm AB at a price of 1.98. Is it a good idea or not given above information? Why? (5%) g=ROE*b Do(1+g) D Vo= k-g k-g