Question 1 Qla. White Lotus Inc has just been granted a patent from the US Patent Office and the company is set to manufacture lithium-ion batteries using their latest technology. Over

the next 5 years, the company projects that they can grow by 25% annually. From year 6 onwards, the company estimates they will reach a sustainable growth due to fierce competitions within the industry. The long-term growth rate is expected to be 4%. The company has just paid a $1 dividend per share. a. What is the expected annual dividend over the next 5 years? b. Assuming that the firm's cost of equity is 12.5%, what is the expected stock price 5 years from now? c. Estimate the company's stock price today. d. What is the expected dividend yield? e. Estimate the company's stock price at year 1, P₁. f. Assume that you're among the company's investors who buys the stock now. You plan to sell the stock in 1 year. What is your expected rate of return? If the stock is fairly priced, what can you infer of your expected rate of return? 15 marks Q1b. Assume that an investment in the S&P500 index gives an average return of 11%. The short-term US government bond provides a risk-free return of 3.5%. a. If you aim to earn an expected return of 8.5%, how would you construct a portfolio from these two assets? b. If you aim to construct the 2-asset portfolio with a beta of 0.5, how much you would invest in the S&P 500 index and in the risk-free bond? c. Calculate the risk-free premium in (a) and (b) and show that they are proportional to their betas.