CAPM and Valuation. You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow -100 1-10 +15 On the basis of the behavior of the firm's stock, you believe that the beta of the firm is 1.4. Assuming that the rate of return available on risk-free investments is 4% and that the expected rate of return on the market portfolio is 12%, what is the net present value of the project?

CAPM and Valuation. You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow -100 1-10 +15 On the basis of the behavior of the firm's stock, you believe that the beta of the firm is 1.4. Assuming that the rate of return available on risk-free investments is 4% and that the expected rate of return on the market portfolio is 12%, what is the net present value of the project?

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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Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $150,000 or $290,000 with equal probabilities of 0.5. The alternative risk-free investment in T-bills pays 3% per year. Required: a. If you require a risk premium of 7%, how much will you be willing to pay for the portfolio? b. Suppose that the portfolio can be purchased for the amount you found in (a). What will be the expected rate of return on the portfolio? c. Now suppose that you require a risk premium of 12%. What price are you willing to pay? Complete this question by entering your answers in the tabs below. Required A Required B Required C If you require a risk premium of 8%, how much will you be willing to pay for the portfolio? Note: Do not round your intermediate calculations. Round your answer to the nearest whole dollar amount. Price Required A Required B >
Calculate the required rate of return for Best Inc., assuming that (1) investors expect a 1.5% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 3.0%, (4) the firm has a beta of 1.2, and (5) its realized rate of return has averaged 10.0% over the last 5 years.
The expected return for the investment is ??? The standard deviation is ??? While the expected return for the risk-free assets, Treasury Bills, is ??? The standard deviation is ???
A manager believes his firm will earn a return of 12.50 percent next year. His firm has a beta of 1.40, the expected return on the market is 10.50 percent, and the risk-free rate is 3.50 percent. Compute the return the firm should earn given its level of risk. (Round your answer to 2 decimal places.) Required return % Determine whether the manager is saying the firm is undervalued or overvalued. O overvalued O undervalued
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow: −$7,100 $1,000 $2,200 $1,400 $1,400 $1,200 $1,000 Use the IRR decision rule to evaluate this project. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.) Should it be accepted or rejected?multiple choice accepted rejected
How can you work this out in Excel? Suppose that we have an investment with an annual return of 10% and an annual standard deviation of 25%. Over a one-year period, what range of returns can we expect with approximately 95% confidence? 1.-15.36% to 55.36% 2.5% to 45% 3.-23.45% to 56.78% 4. -40% to 60%
(Capital Asset Pricing Model) Johnson Manufacturing, Inc., is considering several investments. The rate on Treasury bills is currently 7.5 percent, and the expected return for the market is 10.5 percent. What should be the expected rate of return for each investment (using the CAPM)? Security A B C D Beta 1.62 1.02 0.71 1.34 a. The expected rate of return for security A, which has a beta of 1.62, is%. (Round to two decimal places.)
Calculate the required rate of return for Williams Inc., assuming that (1) investors expect a 2.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 4.0%, (4) the firm has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years. O 10.29% O 7.00% 09.0 O 12.00%
A firm wants to start a project. A team of financial analysts estimated the following cash flows year cash flow 0 -$100,000 1 55,000 2 43,000 3 45,000 Suppose that the discount rate (interest rate) is 12%. The profitability index (PI) is Group of answer choices 15,416.59 1.15 0.87 2.15
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively. Time: 0 1 2 3 4 5 Cash flow: −$ 235,000 $ 65,800 $ 84,000 $ 141,000 $ 122,000 $ 81,200 Use the NPV decision rule to evaluate this project.

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