Answer:
a. $194,690
b. 13%
c. $186,441
Explanation:
The computation is shown below:
a. The amount willing to pay would be equal to
= (Expected return) ÷ (1 + return)
where,
Expected return equals to
= ($150,000 + $290,000) ÷ 2
= $220,000
And, the required rate would be
= 6% + 7%
= 13%
So, amount willing to pay would be
= $220,000 ÷ 1.13
= $194,690
b. The expected return on the portfolio would be
= Alternative risk-free investment in T-bills + risk premium
= 6% + 7%
= 13%
c. The price that willing to pay would be
= (Expected return) ÷ (1 + return)
= $220,000 ÷ 1.18
= $186,441
The return would be
= Alternative risk-free investment in T-bills + risk premium
= 6% + 12%
= 18%