Reference no: EM132613859

(a) You are considering the following four stocks for investment, Project A, Project B, Project C and Project D. You have analyzed them and come up with the following information.

Project Beta Expected Return

A 1.1 10.2%
B 0.9 10.1%
C 1.3 11.8%
D 1.2 11.4%
Market 10.0%
Risk Free Rate 4%

Assuming your analysis is valid:

(i) Please determine for each of the stocks whether they are under or overvalued.

(ii) Which stock is riskiest? Why?

(i) What is the required return for a portfolio of all four stocks comprising A (20%), B (25%), C (35%) and D (20%)?

(ii) (iv) What is the expected return for an equal-weighted portfolio of only the undervalued stocks?

(b) BDC Limited (BDCL) is a biotechnology firm that invests heavily in research and development for vaccines.

(i) Currently, BDCL re-invests all of its cashflows to help fund new R&D. Investors expect VRL to produce net cash inflows of $120 million annually for the next 2 years. In the 3rd to the 5th year, cash flows are expected to grow by 15% annually. Beyond the 5th year, cash flows are expected to grow at a constant rate of 2.5% forever. If investors require a 12% rate of return, what is the current value of BDCL? (Assume all cashflows occur at the end of the year.)

(ii) BDCL announces that it has just discovered a new vaccine, Coronacure, to treat Covid-19. The firm has already spent $120 million developing Coronacure and will have to spend an additional $95 million immediately to prepare the vaccine for sale. Coronoacure is expected to generate cashflows of $140 million for 3 years, with the first cash inflow in one year. What is the new market value of BDCL after the announcement?