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Problem 1 (30 points):
You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 5 years. You expect that the drug’s profits will be \$4 million in its first year and that this amount will grow at a rate of 2% per year for the next 5 years. Once the patent expires, other pharmaceutical companies will be able to produce the same drug and competition will likely drive profits to zero. What is the present value of the new drug if the interest rate is 10% per year?

Exercise 2 (25 points):
You are thinking of purchasing a house. The house costs \$280,000. You have \$30,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The bank is offering a 20-year mortgage that requires annual payments and has an interest rate of 6% per year. What will your annual payment be if you sign up for this mortgage?

Exercise 3 (25 points):
Company ABC Corporation is operating on US market. Risk-free rate on US market is equal to 4%. Beta of company ABC is equal to 1.2. The estimate of risk-premium is equal to 6%.
Question 3.1: Assuming that CAPM model holds, find return on equity for company ABC? (15 points)
Question 3.2: Assuming that CAPM model holds, find return on debt for company ABC? Company ABC has credit rating equal to BB. Use table below. (15 points)

Exercise 4 (13 points): Theoretical question (250 words maximum)
What is the beta of the asset? Could you give an example of the asset that has zero or close to zero beta?
Could you give an example of the asset that has negative beta?

Exercise 5* (7 points):
Derive the formula for the following case: