You are a mutual fund manager. You are interested in company FAB. Company FAB is an all equity company with 1M shares outstanding. Your research indicates that FAB has a CAPM asset beta of 2. You think that the expected free cash flow of FAB will be $10M in year 1 and will grow at 5% thereafter. FAB stocks are currently trading at $73 per share. FAB pays out all its FCF as dividends. FAB does not have any cash. The risk free rate is 4% and the market risk premium is 7%. Ignore taxes or transaction costs.

a) What is the fair price of FAB shares in year 0?

b) What will be the fair price of FAB shares in year 1?

You expect that FAB shares will be trading at the fair price in year 1. You purchase 10,000 shares of FAB today and hold it for a year.

c) What is your expected return from year 0 to year 1?

d) What is the cost of capital of your portfolio? What is the CAPM alpha of your portfolio?

e) What is the NPV of your portfolio in year 0?