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s. You are considering acquiring a firm that you believe can generate expected cash flows of $10,000 a year forever. However, you reogine ha boe oash 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%? (5 points) b. By how much will you overvalue the firm if its beta is actually 0.6? (5 points) 第5页共7页
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Answer #1

Answer a.

Risk-free Rate = 4%
Beta = 0.40
Market Return = 11%

Required Return = Risk-free Rate + Beta * (Market Return - Risk-free Rate)
Required Return = 4.00% + 0.40 * (11.00% - 4.00%)
Required Return = 6.80%

Value of Firm = Expected Cash Flows / Required Return
Value of Firm = $10,000 / 0.0680
Value of Firm = $147,058.82

Answer b.

Risk-free Rate = 4%
Beta = 0.60
Market Return = 11%

Required Return = Risk-free Rate + Beta * (Market Return - Risk-free Rate)
Required Return = 4.00% + 0.60 * (11.00% - 4.00%)
Required Return = 8.20%

Value of Firm = Expected Cash Flows / Required Return
Value of Firm = $10,000 / 0.0820
Value of Firm = $121,951.22

So, value of firm is overvalued by $25,107.60 ($147,058.82 - $121,951.22)

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