PRIN.OF CORP.FINANCE-CONNECT ACCESS
PRIN.OF CORP.FINANCE-CONNECT ACCESS
13th Edition
ISBN: 2810023360757
Author: BREALEY
Publisher: MCG
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Chapter 9, Problem 21PS

Certainty equivalents* A project has a forecasted cash flow of $110 in year 1 and $121 in year 2. The interest rate is 5%, the estimated risk premium on the market is 10%, and the project has a beta of .5. If you use a constant risk-adjusted discount rate, what is

  1. a. The PV of the project?
  2. b. The certainty-equivalent cash flow in year 1 and year 2?
  3. c. The ratio of the certainty-equivalent cash flows to the expected cash flows in years 1 and 2?
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