Assume that the risk-free rate of interest is 4% and the expected rate of return on...

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Question

Assume that the risk-free rate of interest is 4% and the expected rate of return on the market is 14%. I am buying a firm wit

Answer 1

Answer #1

Using CAPM Model,

Required Return when Beta is 0.50 = 0.04 + 0.50(0.14 - 0.04) = 9.00%

Value of Cash Flow = 3,000/0.09 = $33,333.33

Required Return when Beta is 1 = 0.04 + 1(0.14 - 0.04) = 14.00%

Value of Cash Flow = 3,000/0.14 = $21,428.57

Extra Amount Paid = 33,333.33 - 21,428.57

Extra Amount Paid = $11,904.76

Answer 2

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