1. 10 points. (a) Briefly explain the role of a firm’s board of directors vis-à-vis the shareholders and the management team.(b) Briefly explain how any one of the following three arrangements...

1. 10 points. (a) Briefly explain the role of a firm’s board of directors vis-à-vis the shareholders and the management team.(b) Briefly explain how any one of the following three arrangements insulates managements from shareholder pressure: (i) staggered boards (ii) dual-class shares (‘founder’s shares’ in the text)(iii) anti-takeover provisions / poison pills2. 35 points. (a) A firm has just paid a dividend of $7.50 per share. Its growth rate is estimated to be 6% for the foreseeable future. Its beta is 1, the risk-free rate is 2%, and the market premium is 7%. Use the dividend discount model to find the value for each of the firm’s shares.(b) What is the PE ratio for the firm? (assume that its earnings are always equal to its dividend. Use next year’s earnings for the ratio.)(c) Now again find the price and PE ratio, but now change the beta to 1.5.(d) Now again find the price and PE ratio, but now change the beta back to 1 but assume a growth rate of only 4%.(e) Comparing the PE ratios in (b), (c), and (d), what do they reveal about the relationship between the PE ratio and growth and risk, respectively?3. 25 points. (a) Suppose that a firm will pay dividends of $3.50 next year and $3 in two years. In year 3, the dividend will be $6, and afterwards the dividend will grow at a constant rate of 10% per year. (i) What will be the value of each share of the firm in two years (sometimes referred to as the ‘horizon’ value’)? (ii) What should be the value of each share of the firm right now?4. 15 points. Now use the free cash flow valuation method to find the value per share for the following firm: A firm has just reported free cash flow to the firm (FCFF) for the last year as having been $65 Million. This amount is expected to grow at a rate of 2.5% per year for the foreseeable future. In addition, the firm’s WACC is estimated to be 7%. The firm has 10 Million shares outstanding. Finally, the firm has previously issued $400 Million in debt, but the current market value of this debt now appears to be $450 Million, given that interest rates have declined.5. 5 points. What are the main ways in which preferred shares differ from common shares? 6. 10 points. A firm has just reported net income of $500 Million for the latest year. In addition, the firm has outstanding 75 Million shares, each one of which currently trades at $60 per share.(a) What is the firm’s EPS? Therefore, what is its PE ratio?(b) What is the firm’s market capitalization? Again find its PE ratio, this time using the market cap and its total earnings (not per share).Extra Credit. 5 points each.1.You talk finance with your two closest friends:Friend One: “Stock XYZ is clearly overvalued, since its PE ratio is 30. Its growth rate is 1% annually, and its discount rate is 6%.”Friend Two: “It is ridiculous for you to claim the stock is overvalued without first discussing the firm’s price and its earnings!”Which of your friends is right, and why?(Note: use the dividend discount model. Assume dividends and earnings are equal.)2. Re-do Question 2 (b), except now assume that the firm’s earnings per share start at $15 instead of $7.50 – that is, they start at double their previous value, but all the other assumptions stay the same. What is your intuition for the new PE ratio relative to the old one?