Nikul Problem 12-31 CAPM and Valuation (LO3)You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for theproject are as follows:Years0Cash Flow-100+141-10On the basis of the behavior of the firm's stock, you believe that the beta of the firm is 1.41. Assuming that the rate of return availableon risk-free Investments is 5% and that the expected rate of return on the market portfolio is 13%, what is the net present value of theproject?Note: Negative amount should be Indicated by a minus sign. Do not round Intermediate calculations. Enter your answer in millionsof dollars rounded to 2 decimal places.Net present valuemillion

We will utilize the Capital Asset Pricing Model (CAPM) to determine the necessary rate of return and…

Answered: Problem 12-31 CAPM and Valuation (LO3)…

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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31. 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? (LO12-3)
PS #1 Type B: You are follows. Year 0: initial outlay of 120, Years 1 to 10: 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 16 each year. On the basis of the behavior of the firm's stock, you believe that the beta of the firm is 1.5 . Assuming that the rate of return available on risk-free investment is 48 and that the expected rate of return on the market portfolio is 12%, what is the (risk-adjusted) net present value of the project?
Question 7 The financial manager of O.Biney Ltd is considering investing in a building project costing $200,000. The following cash flows are expected from the project. The beta of the project is 1.25 and the market return is 25%. The risk free rate of return is 14%. Year $ 0 (200,000) 1 40,000 2 45,000 3 92,000 4 95,000 e) What is the expected return/cost of equity on this project? f) GBaidoo Enterprise is a levered entity with percentage of debt out of total capital being 40%. If the interest rate on a bank loan is 20% and the cost of equity is as computed in (a), what will be the NPV of the investment? g) What is the IRR for the project? h) Reinvesting at overall cost of capital, what will be the MIRR for the proposed investment? i) What is the payback period of the project and the accounting rate of return? j) What will be your overall advice concerning viability of the project?
Question 3 You are trying to develop a strategy for investing in two different stocks. The anticipated annual return for a ¢1,000 investment in each stock under four different economic conditions has the following probability distribution: Returns Probability Economic Condition Stock X Stock Y 0.1 Recession -50 -100 0.3 Slow Growth 20 50 0.4 Moderate Growth 100 130 0.2 Fast Growth 150 200 (a) Which of the investments has a better return and why? (b) Which of the investments is relatively less risky and why? (c) What type of association exists between the two-investment options X and Y? Interpret your results.
Question1: A: Currently under consideration is an investment with a beta, b, of 1.50. At this time, the risk-free rate of return, RF, is 7%, and the return on the market portfolio of assets, rm, is 10%. Calculate the Required return using capm? B: An analyst predicted last year that the stock of Logistics, Inc., would offer a total return of at least 10% in the coming year. At the beginning of the year, the firm had a stock market value of $10 million. At the end of the year, it had a market value of $12 million even though it experienced a loss, or negative net income, of $2.5 million. Did the analyst’s prediction prove correct? Explain using the values for total annual return.
answer last 3 questions
Problem 9-18 Assume that the risk-free rate of interest is 5% and the expected rate of return on the market is 12%. I am buying a firm with an expected perpetual cash flow of $2,000 but am unsure of its risk. If I think the beta of the firm is 0.5, when in fact the beta is really 1, |how much more will I offer for the firm than it is truly worth? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Amount offered in excess
Capital Assets Pricing Model (CAPM) (20 points) 4. You have landed an interview with Gold & Silver Bank, and they are asking you to calculate the expected return on a series of assets they are evaluating. They provide the data below and have sent you a few additional questions. Risk-free rate 5.26% Stock Expected Return Betas ALMM 45.32% 9.2 AIR 34.10% 5.1 BLUE 61.20% 3.7 87.20% 4.5 MON Given the expected return on an asset, E(Ri), is equal to the risk-free rate, Rf, plus the risk premium. - E(R)=R₂+ [E(RM) – Rƒ] × Bi What is each stock's expected return, E(Ri)? Provide the result as x.xx%.
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 0 1-10 Cash Flow -100 +17 On the basis of the behavior of the firm's stock, you believe that the beta of the firm is 1.39. Assume that the rate of return available on risk-free investments is 6% and that the expected rate of return on the market portfolio is 14%. a. What is the project IRR? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. b. What is the cost of capital for the project? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. Does the accept-reject decision using IRR agree with the decision using NPV? > Answer is complete but not entirely correct. a. IRR 17.12 % b. Cost of capital 17.22 % c. Does the accept-reject decision using IRR agree with the decision using NPV? Yes
pr.1
#24 investment Let's assume that you're thinking about buying stock in West Coast Electronics. So far in your analysis, you've uncovered the following information: The stock pays annual dividends of $4.97 a share indefinitely. It trades at a P/E of 10.5 times earnings and has a beta of 1.19. In addition, you plan on using a risk-free rate of 5.00% in the CAPM, along with a market return of 11%. You would like to hold the stock for 3 years, at the end of which time you think EPS will be $7.91 a share. Given that the stock currently trades at $57.97, use the IRR approach to find this security's expected return. Now use the dividend valuation model (with constant dividends) to put a price on this stock. Does this look like a good investment to you? Explain.
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