INVESTMENTS-CONNECT PLUS ACCESS
11th Edition
ISBN: 2810022611546
Author: Bodie
Publisher: MCG
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Chapter 9, Problem 18PS
Summary Introduction
To calculate:
The extra amount that the investor has to offer in case the beta of the firm is considered to be 0 instead of 1
Introduction:
Security market line refers to the line drawn over the chart that represents CAPM,
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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-free
rate is 5% and the expected market risk premium is 9%? (Do not round the discount rate In your
calculation. Round your answer to the nearest cent.)
The value of the firm
$ 121212.1
b. By how much will you misvalue the firm if its beta is actually 0.5? (Do not round the discount
rate In your calculatlon. Do not round Intermedlate calculations. Round your answer to the
nearest cent. Enter your answer as positive value.)
By underestimating beta, you would overvalue
the finm by $ 6926.41
You are considering acquiring a firm that you believe can generate expected cash flows of $10,000 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-free rate is 4% and the expected rate of
return on the market portfolio is 11%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Value of the firm
b. By how much will you overvalue the firm if its beta is actually 0.6? (Do not round intermediate calculations. Round your answer to
2 decimal places.)
Overvaluation
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Chapter 9 Solutions
INVESTMENTS-CONNECT PLUS ACCESS
Ch. 9 - Prob. 1PSCh. 9 - Prob. 2PSCh. 9 - Prob. 3PSCh. 9 - Prob. 4PSCh. 9 - Prob. 5PSCh. 9 - Prob. 6PSCh. 9 - Prob. 7PSCh. 9 - Prob. 8PSCh. 9 - Prob. 9PSCh. 9 - Prob. 10PS
Ch. 9 - Prob. 11PSCh. 9 - Prob. 12PSCh. 9 - Prob. 13PSCh. 9 - Prob. 14PSCh. 9 - Prob. 15PSCh. 9 - Prob. 16PSCh. 9 - Prob. 17PSCh. 9 - Prob. 18PSCh. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Prob. 21PSCh. 9 - Prob. 22PSCh. 9 - Prob. 23PSCh. 9 - Prob. 24PSCh. 9 - Prob. 1CPCh. 9 - Prob. 2CPCh. 9 - Prob. 3CPCh. 9 - Prob. 4CPCh. 9 - Prob. 5CPCh. 9 - Prob. 6CPCh. 9 - Prob. 7CPCh. 9 - Prob. 8CPCh. 9 - Prob. 9CPCh. 9 - Prob. 10CPCh. 9 - Prob. 11CPCh. 9 - Prob. 12CP
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- You are considering acquiring a firm that you believe can generate expected cash flows of $10,000 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-free rate is 4% and the expected rate of return on the market portfolio is 11%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Value of the firm b. By how much will you overvalue the firm if its beta is actually 0.6? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Overvaluation < Prev 7 of 8 Next m earcharrow_forwardIf the return on the risk-free asset is 2.25% (Rf = 2.25%) and the market return is 6.50% (Rm = 6.50%), what is the beta of Bank of America, BAC, if it has had a return of 9.14%? You must show all counts.arrow_forwardTotal 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 CAPMarrow_forward
- 8) A public firm’s beta is 1.5. The expected market return is 5%, risk-free rate is assumed to be 1% constant. What is the expected return of the firm using CAPM?arrow_forwardSuppose you are the financial manager of a company, and there are three potential projects for investment. The risk free rate is 2%. The market risk premium is 6%. The beta of the company is 0.6. You need to invest $100 today for Project A, and project A is expected to provide a cash flow of $6 a share forever. The beta for this project is 0.75. You need to invest $105 today for Project B, and project B is expected pay $3.5 next year. Thereafter, payment growth is expected to be 3% a year forever. The beta for this project is 0.7. You need to invest $175 today for project C, and project C is expected to pay $1.25, $3.80, and $3.00 over the next three years, respectively. Starting in year 4 and thereafter, dividend growth is expected to be 3.5% a year forever. The beta for this project is 0.5. (a1) What's the expected return of the market portfolio? And what's the beta for this market portfolio? (a2) What is the discount rate for each project?(a3) which project(s) will you invest? And…arrow_forward2- Assume that the market has an expected return of 12% and volatility (standard deviation) of 20%. Company X has a 50% volatility (standard deviation). The correlation between the market and Company X is 90%. The risk-free rate is 3%. What would be the expected return on Company X? (Hint: You have to check my lecture note (Lecture Note #10b - Risk and Return: Capital Asset Pricing Model (CAPM)) 23% O 23,25% 23,50% 23,75% Diğer:arrow_forward
- How do we calculate 14.3 B in this question.arrow_forwardSuppose the rate of return on short-term government securities (perceived to be risk-free) is about 5%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model:a. What is the expected rate of return on the market portfolio?b. What would be the expected rate of return on a stock with β = 0?c. Suppose you consider buying a share of stock at $40. The stock is expected to pay $3 dividends next year and you expect it to sell then for $41. The stock risk has been evaluated at β = −.5. Is the stock overpriced or underpriced?arrow_forwardThe return on the market is 10.5% and the risk-free rate is 2.90%. The investor is conservativeand his beta (β) is 0.75.a) What is the required rate of return for this investment using the CAPM approach?b) What if the (β) is 1.75, but the risk-free rate is 5% and the market return is 10.5%? What is the required rate of return for this investment? Please do it in excel and show the formulas.arrow_forward
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