Gen Combo Looseleaf Principles Of Corporate Finance With Connect Access Card
Gen Combo Looseleaf Principles Of Corporate Finance With Connect Access Card
13th Edition
ISBN: 9781260695991
Author: Richard A Brealey
Publisher: McGraw-Hill Education
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Chapter 9, Problem 22PS

Certainty equivalents A project has the following forecasted cash flows:

Chapter 9, Problem 22PS, Certainty equivalents A project has the following forecasted cash flows: The estimated project beta

The estimated project beta is 1.5. The market return rm is 16%, and the risk-free rate rf is 7%.

  1. a. Estimate the opportunity cost of capital and the project’s PV (using the same rate to discount each cash flow).
  2. b. What are the certainty-equivalent cash, flows in each year?
  3. c. What is the ratio of the certainty-equivalent cash flow to the expected cash flow in each year?
  4. d. Explain why this ratio declines.
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