Assume the APT equation holds for three factors as follows: • SMB with a factor beta of 0.9 with a factor risk premium of 6%. • HML with a factor beta of 0.8 with a factor risk premium of 7%. ⚫ MOM with a factor beta of 0.4 with a factor risk premium of 4%. Assume the following: ⚫ The risk free rate is 5% • A project requires an investment at t = 0 of 250. • Expected Cash Flows of 100 eventuate at t = 1. Expected Cash Flows grow at 6% annually until t = 5. At t = 5 the project is shut down. There are no taxes or shut down costs. Answer the following: (a) Using the APT, what is the expected return? (b) Using the expected return using the APT, what is the expected project NPV?
Assume the APT equation holds for three factors as follows: • SMB with a factor beta of 0.9 with a factor risk premium of 6%. • HML with a factor beta of 0.8 with a factor risk premium of 7%. ⚫ MOM with a factor beta of 0.4 with a factor risk premium of 4%. Assume the following: ⚫ The risk free rate is 5% • A project requires an investment at t = 0 of 250. • Expected Cash Flows of 100 eventuate at t = 1. Expected Cash Flows grow at 6% annually until t = 5. At t = 5 the project is shut down. There are no taxes or shut down costs. Answer the following: (a) Using the APT, what is the expected return? (b) Using the expected return using the APT, what is the expected project NPV?
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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a and b please
Transcribed Image Text:Assume the APT equation holds for three factors as follows:
• SMB with a factor beta of 0.9 with a factor risk premium of 6%.
• HML with a factor beta of 0.8 with a factor risk premium of 7%.
⚫ MOM with a factor beta of 0.4 with a factor risk premium of 4%.
Assume the following:
⚫ The risk free rate is 5%
• A project requires an investment at t = 0 of 250.
• Expected Cash Flows of 100 eventuate at t = 1.
Expected Cash Flows grow at 6% annually until t = 5.
At t = 5 the project is shut down.
There are no taxes or shut down costs.
Answer the following:
(a) Using the APT, what is the expected return?
(b) Using the expected return using the APT, what is the expected project NPV?
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