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ddd [48]
2 years ago
12

I am buying a firm with an expected perpetual cash flow of $1,000 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 4% and the expected rate of return on the market is 10%. (Input the amount as a positive value.)
Business
1 answer:
Nitella [24]2 years ago
8 0

Answer:

$15,000

Explanation:

Value of a perpetuality = cash flow / r

According to the capital asset price model: Expected rate of return = risk free + beta x (market rate of return - risk free rate of return)

4 + 0 (10 - 4) = 4

1,000/ 0.04 = 25,000

4 + 1 (10 - 4) = 10

1000 / 0.1 = 10,000

25,000 - 10,000 = 15,000

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