Consider an economy with three states which occur with probability (0.2, 0.2, 0.6). Suppose a firm has a project which generates the state dependent cash flows (100, 240, 220) at t=1. The investment costs are 170 at t=0. The firm has 170 at t=0. The market portfolio generates the payoff (200, 230, 260) and has an expected return of 10%. The risk free rate is 2%. Suppose the CAPM holds. (a) What is the beta of this project? (b) What is the net present value of the project? Explain whether the firm should conduct the project.
Consider an economy with three states which occur with probability (0.2, 0.2, 0.6). Suppose a
firm has a project which generates the state dependent cash flows (100, 240, 220) at t=1. The
investment costs are 170 at t=0. The firm has 170 at t=0. The market portfolio generates the
payoff (200, 230, 260) and has an expected return of 10%. The risk free rate is 2%. Suppose
the CAPM holds.
(a) What is the beta of this project?
(b) What is the
the project.
CAPM means Capital Assets Pricing Model. The formula for CAPM is: E(r)=Rf+beta(Rm-Rf) NPV is the difference between present value of cash outf
lows and cash inflows. Higher the NPV, better is the project.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
