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Lemur [1.5K]
3 years ago
15

Suppose that borrowing is restricted so that the zero-beta version of the CAPM holds. The expected return on the market portfoli

o is 17%, and on the zero-beta portfolio it is 8%. What is the expected return on a portfolio with a beta of 0.7? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Business
1 answer:
statuscvo [17]3 years ago
6 0

Answer:

The expected return on a portfolio is 14.30%

Explanation:

CAPM : It is used to described the risk of various types of securities which is invested to get a better return. Mainly it is deals in financial assets.

For computing the expected rate of return of a portfolio , the following formula is used which is shown below:

Under the Capital Asset Pricing Model, The expected rate of return is equals to

= Risk free rate + Beta × (Market portfolio risk of return - risk free rate)

= 8% + 0.7 × (17% - 8%)

= 8% + 0.7 × 9%

= 8% + 6.3%

= 14.30%

The risk free rate is also known as zero beta portfolio so we use the value in risk free rate also.

Hence, the expected return on a portfolio is 14.30%

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Answer:

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Using the values provided in the question, we get,

Year 0 Net Cash Flow = -190,000 - 47,500 - 9,500 = -$247,000

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Part B:

Year 1, 2 and 3 would required adjustment for depreciation charges (under MACRS) against expected savings. The depreciation rates for 3 year class asset would be 33%, 45% and 15% for Year 1, Year 2 and Year 3 respectively.

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Depreciation (Year 1) = (190,000 + 47,500)*33% = $78,375

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Part C:

Additional non operating cash flow would consist of after-tax salvage value and return of net working capital. Relevant formulas are:

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