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10. CAPM and Valuation. You are considering acquiring a firm that you believe can generate expected cash flows of $10,000 a year forever. However, you
10. CAPM and Valuation. You are considering acquiring a firm that you believe can generate expected cash flows of $10,000 a year forever. However, you recognize that those cash flows are uncertain. (LO12-2) a. Suppose you believe that the beta of the firm is .4. How much is the firm worth if the risk-free rate is 4% and the expected rate of return on the market portfolio is 11%? b. By how much will you overvalue the firm if its beta is actually .6? 11. CAPM and Expected Return. If the risk-free rate is 6% and the expected rate of return on the market portfolio is 13%, is a security with a beta of 1.25 and an expected rate of return of 16% overpriced or underpriced? (L012-2)
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