Corporate Finance
Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 18.1, Problem 2CC
Summary Introduction

To discuss: The situation in which the risk of a project is likely to match with the overall firm.

Introduction:

The risk includes the possibility of gaining or losing something from the investment made.

A firm is a business organization, like a company, partnership or limited liability that sells goods and services to earn profit.

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Assume an investor deposits $116,000 in a professionally managed account. One year later, the account has grown in value to $136,000 and the investor withdraws $43,000. At the end of the second year, the account value is $107,000. No other additions or withdrawals were made. During the same two years, the risk-free rate remained constant at 3.94 percent and a relevant benchmark earned 9.58 percent the first year and 6.00 percent the second. Calculate geometric average of holding period returns over two years. (You need to calculate IRR of cash flows over two years.) Round the answer to two decimals in percentage form.
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