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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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 earch
Assume that the risk-free rate of interest is 4% and the expected rate of return on the market is 18%. I am buying a firm with an expected perpetual cash flow of $1,000 but am unsure of its risk. If I think the beta of the firm is 0.7, when in fact the beta is really 1.4, how much more will I offer for the firm than it is truly worth? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Amount offered in excess
You're considering purchasing Proctor and Gamble Stock. Suppose the risk-free interest rate is 5.0% and the stock market's expected return is 13.50%. Also, suppose that if the stock market's value rises by 1%, stock in Proctor and Gamble typically rises by 1%. a. What is the percentage of Proctor and Gamble's risk premium? c. What is the correct discount rate to use according to the Capital Asset Pricing Model (CAPM) when analyzing the present value of future cash flows from this stock?
I am buying a firm with an expected perpetual cash flow of $900 but am unsure of its risk. If I think the beta of the firm is 0, when the beta is really 1, how much more will I offer for the firm than it is truly worth? Assume the risk-free rate is 6% and the expected rate of return on the market is 20%. (Input the amount as a positive value.)
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?
If 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.
Assume that the risk-free rate of interest is 6% and the expected rate of return on the market is 16%.I am buying a firm with an expected perpetual cash flow of $1,000 but am unsure of its risk. If I think the beta of the firm is .5, when in fact the beta is really 1, how much more will I offer for the firm than it is truly worth?
Suppose the SML has a risk-free rate of 5% and an expected market return of 15%. Now suppose that the SML shifts, changing slope, so that kRF is still 5% but kM is now 16%. What does this shift suggest about investors’ risk aversion? If the slope were to change downward, what would that suggest?
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The risk-free rate is currently 3.3%, and the market return is 14.8%. Assume you are considering the following investments: Investment Beta A 1.54 B 1.16 C 0.51 D 0.11 E 2.14 . a. Which investment is most risky? Least risky? b. Use the capital asset pricing model (CAPM) to find the required return on each of the investments. c. Find the security market line (SML), using your findings in part b. d. On the basis of your findings in part c, what relationship exists between risk and return? Explain.
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