In parts (A), (B), and (C) below assume that the risk-free interest rate is 3 percent and the market risk premium is 7 percent. A. Dorothy Inc. is considering a project that will generate after-tax annual cash flows of $600,000 for 6 years. The beta of the project is 1.0, and the investment cost for the project is $2,700,000. Should the firm undertake the project? Explain. B. Wicked Witch of the West Inc. is considering a project that will generate after tax cash flows of $600,000 for 10 years. The beta of its project is 1.2, and the investment cost for the project is $3,400,000. Should the firm undertake the project? C. Draw a graph of the SML and locate the projects (A) and (B) on the graph.
In parts (A), (B), and (C) below assume that the risk-free interest rate is 3 percent and the market risk premium is 7 percent. A. Dorothy Inc. is considering a project that will generate after-tax annual cash flows of $600,000 for 6 years. The beta of the project is 1.0, and the investment cost for the project is $2,700,000. Should the firm undertake the project? Explain. B. Wicked Witch of the West Inc. is considering a project that will generate after tax cash flows of $600,000 for 10 years. The beta of its project is 1.2, and the investment cost for the project is $3,400,000. Should the firm undertake the project? C. Draw a graph of the SML and locate the projects (A) and (B) on the graph.
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
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Transcribed Image Text:4. Capital Asset Pricing Model
In parts (A), (B), and (C) below assume that the risk-free interest rate is 3 percent and the market
risk premium is 7 percent.
A. Dorothy Inc. is considering a project that will generate after-tax annual cash flows of
$600,000 for 6 years. The beta of the project is 1.0, and the investment cost for the project is
$2,700,000. Should the firm undertake the project? Explain.
B. Wicked Witch of the West Inc. is considering a project that will generate after tax cash flows
of $600,000 for 10 years. The beta of its project is 1.2, and the investment cost for the project is
$3,400,000. Should the firm undertake the project?
C. Draw a graph of the SML and locate the projects (A) and (B) on the graph.
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