You are considering acquiring a firm that you believe can generate expected free cash flows of$8,000 a year forever. However, you recognize that those cash flows are uncertain.a. Suppose you believe that the beta of the firm is 0.4. How much is the firm worth if the risk-freerate is 5% and the expected market risk premium is 9%? (Do not round the discount rate In yourcalculation. Round your answer to the nearest cent.)The value of the firm$ 121212.1b. By how much will you misvalue the firm if its beta is actually 0.5? (Do not round the discountrate In your calculatlon. Do not round Intermedlate calculations. Round your answer to thenearest cent. Enter your answer as positive value.)By underestimating beta, you would overvaluethe finm by $ 6926.41

Answer) Calculation of Value of Firm if Beta is 0.40 Value of firm = Expected Annual frees cash…

Answered: You are considering acquiring a firm…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Similar questions

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 statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow -1,040 140 460 660 660 260 660 Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
Consider a firm with a beta of 1.57. If the market return is 6.73% and the risk-free rate is 0.90%, what is the firm's expected return according to the capital asset pricing model? Round your answer to four decimal places, e.g., enter 12.34 for 12.34%.
Conglomco has a beta of 0.32. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is Conglomco's required return? Use the capital asset pricing model (CAPM) to calculate Conglomco's required return.
(Capital Asset Pricing Model) CSB, Inc. has a beta of 0.758. If the expected market return is 10.5 percent and the risk-free rate is 6.5 percent, what is the appropriate expected return of CSB (using the CAPM)? The appropriate expected return of CSB is%. (Round to two decimal places.)
The value of a firm's future cash flows is estimated at 230M. The continuously compounded risk-free rate is 3%. The duration of firm's debt is 11 years. The face value of the firm's debt is 280M. The volatility of firm cash flows is 0.22. The firm pays no dividends. Use the notion of equity as a call option on the value of the firm. Let the firm now accept a project that has an NPV of -10M and increases the volatility of the firm to 0.30. What is the new value of the firm's equity?
(Capital Asset Pricing Model) Breckenridge, Inc., has a beta of 0.79. If the expected market return is 10.0 percent and the risk-free rate is 6.0 percent, what is the appropriate expected return of Breckenridge (using the CAPM)? The appropriate expected return of Breckenridge is %. (Round to two decimal places.)
You are considering a risky investment that you expect will either be worth 115,000 in 1 year, or 65,000, with probabilities of 0.65 and 0.35 for each outcome, respectively. You could invest in riskless T-bills at 0.058. If you invest in this risky investment, you would expect to earn a risk premium of 0.091 Given this information, what would you be willing to pay for this investment? 84,856 78,059 79,001 73,655 82,693
Puji International Freight Company (PIFC) wishes to determine the required return on Asset J, which has a beta of 1.75. The risk-free rate of return is 6.4% and the return on the market portfolio of assets is 10.8%. Suppose PIFC is also considering investing in asset K, which has a beta of 1.8. Is there a market premium or market discount? Justify your answer. Determine the required return of assets J and K. Show your solutions. Interpret your answer. Graph the Security Market Line for both assets. Between assets J and K, can you determine which has more total risk and which has more market risk? Determine which stock has a higher cost of equity capital. If you are the financial consultant of PIFC, what will be your investment strategy?
(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.)
Total investment risk can be broken down into two types of risk. What are these two types of risk and which should NOT affect expected return? (b) A firm has a beta of 1.3. The expected market return is 12% and the risk-free rate is 2%. What should be the firm's equity cost of capital? Use CAPM
Suppose that you have found the optimal risky combination using all risky assets available in the economy, and that this optimal risky portfolio has an expected return of 0.19 and standard deviation of 0.24. The T-bill rate is 0.05. What fraction of your money must be invested in the optimal risky portfolio in order to form a complete portfolio with an expected return of 0.09? Round your answer to 4 decimal places. For example, if your answer is 3.205 %, then please write down 0.0321..
The following question illustrates the APT. Imagine that there are only two pervasive macroeconomic factors. Investments X, Y, and Z have the following sensitivities to these two factors: Investment b1 b2 X 1.75 0 Y −1.00 2.00 Z 2.00 1.00 We assume that the expected risk premium is 7.8% on factor 1 and 11.8% on factor 2. Treasury bills obviously offer zero risk premium. According to the APT, what is the risk premium on each of the three stocks? Suppose you buy $500 of X and $125 of Y and sell $375 of Z. What is the sensitivity of your portfolio to each of the two factors? What is the expected risk premium? Suppose you buy $200 of X and $150 of Y and sell $100 of Z. What is the sensitivity of your portfolio to each of the two factors? What is the expected risk premium? Finally, suppose you buy $400 of X and $50 of Y and sell $200 of Z. What is your portfolio's sensitivity now to each of the two factors? And what is the expected risk premium?

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