Consider right triangle MNO below which expression represents the length of side MN
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From the question we are told that:
Year 1= \$110
Year 2 = \$121
Risk free rate is
Risk premium
a)
Generally, the equation for Equity Return is mathematically given by
Therefore Present Value (PV) is
b)
Generally, the equation for certainty-equivalent cash flow is mathematically given by
Therefore
For Certainty-equivalent cash flow Year One
For Certainty-equivalent cash flow Year Two
c)
The Ratio of the certainty-equivalent cash flows to the expected cash flows in years 1 and 2 could be written as
or