**Investment Risk Analysis: Misestimating Firm's Beta**Assume that the risk-free rate of interest is 4% and the expected rate of return on the market is 18%. You plan to buy a firm with an expected perpetual cash flow of $1,000 but are unsure about its risk. If you believe the beta of the firm is 0.7, whereas the actual beta is 1.4, you need to calculate how much more you are offering for the firm than its true worth. *(Do not round intermediate calculations. Round your answer to 2 decimal places.)***Input Field:**- **Amount offered in excess** (input box for value)

As per CAPM Ri = Rf + B (Rm - Rf) Where Ri = Return on equity Rf = Risk free rate of return B =…

Assume that the risk-free rate of interest is 4% and the expected rate of return on the market is 18%. I am buying a firm with an expected perpetual cash flow of $1,000 but am unsure of its risk. If I think the beta of the firm is 0.7, when in fact the beta is really 1.4, how much more will I offer for the firm than it is truly worth? (Do not round intermediate calculations. Round your answer to 2

Assume that the risk-free rate of interest is 4% and the expected rate of return on the market is 18%. I am buying a firm with an expected perpetual cash flow of $1,000 but am unsure of its risk. If I think the beta of the firm is 0.7, when in fact the beta is really 1.4, how much more will I offer for the firm than it is truly worth? (Do not round intermediate calculations. Round your answer to 2

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

**Investment Risk Analysis: Misestimating Firm's Beta**

Assume that the risk-free rate of interest is 4% and the expected rate of return on the market is 18%. You plan to buy a firm with an expected perpetual cash flow of $1,000 but are unsure about its risk. If you believe the beta of the firm is 0.7, whereas the actual beta is 1.4, you need to calculate how much more you are offering for the firm than its true worth.

*(Do not round intermediate calculations. Round your answer to 2 decimal places.)*

**Input Field:**
- **Amount offered in excess** (input box for value)

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