1. Assume that you short-sell 50 shares of a stock at a price of $100 a share, putting up $4,000 cash and borrowing $1,000 at an interest rate of 5%. If, after one year, the price fell to $70 and a dividend of $5/share was paid, what would be your return on investment?
2. Assume that Orange Inc. has earnings before interest and taxes totaling $100 million and is expected to grow 5% in the future by investing 25% of their pretax cash flow annually. The firm reported depreciation of $4 million, debt totaling $20 million and pays 10% on that debt (which is the same as their cost of equity). The company’s effective tax rate is 30%. Use the free cash flow approach to value the firm’s equity.