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jasminecoronetti44
12.08.2020 •
Business
I am buying a firm with an expected perpetual cash flow of $700 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 7% and the expected rate of return on the market is 14%. (Input the amount as a positive value.)
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Ответ:
$50
Explanation:
using the CAPM,
The expected rate of return = risk free rate + beta(market rate of return - risk free rate)
if beta is 0,
7% + 0 X(14% - 7%) = 7%
If beta is 1,
7% + 1 X(14% - 7%) = 14%
Present value of a perpetuity = amount / expected rate of return
if beta is 0, present value = $700 / 7% = $100
if beta is 1, present value = $700 / 14% = $50
the amount offered will differ by $100 - $50 = $50
Ответ:
The answer is opportunity at the margin