Assume that the risk-free rate of interest is 3% and the expected rate of return on the market is 15%. I am buying a firm with an expected perpetual cash flow of $2,000 but am unsure of its risk. If I think the beta of the firm is 0.8, when in fact the beta is really 1.6, how much more will I offer for the firm than it is truly worth

The correct solution is "$6,564.01". A further solution is given below.

Explanation:

The given values are:

beta,

= 1.6

market return,

= 15%

cash flow,

= $2,000

risk free rate of interest,

= 3%

Now,

The stock return will be:

=

=

=

The actual worth of the firm will be:

=

=

=

=

With 0.8 beta, the stock return will be:

=

=

=

So that I'm paying for the firm,

=

=

= ($)

Hence,

I'm paying,

=

= ($)

Fee Simple Absolute

Explanation:

Fee Simple Absolute this is a form of freehold estate in which the owner has the exclusive right to do as he or she wish on the estate property. This includes all the right such as ownership, to sell, damage, and even pass to heirs when he or she dies. It is considered the greatest type of estate any man can hold.

Hence, in this case, the right answer is Fee Simple Absolute