com/hm.tpx nnect shows what is correct and incorrect for the work you have compl

Question

com/hm.tpx nnect shows what is correct and incorrect for the work you have completed so far the work you have done so far is correct, you may not have completed everything 0.00 points I am buying a firm with an expected perpetual cash flow of $600 but am unsure of its risk. if I think the beta of value.) Present value diference . 26210 the firm is zero, 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 15%. (input the amoont as a Positive MacBook Pro 2

Explanation / Answer

Using CAPM, Required return with beta = 0 is

r = Rf + beta x (Rm - Rf) = 4% + 0 x (15% - 4%) = 4%

PV of perpetuity = Cash Flow / Required Return = 600 / 4% = $15,000

With beta = 1

r = 4% + 1 x (15% - 4%) = 15%

=> PV of perpetuity = 600 / 15% = $4,000

=> PV difference = $15,000 - $4,000 = $11,000

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