Question
Consider the following investment cash flows: year cash flows 0 (1,000) 1 250 2 400 3 500 4 600 5 600 A). what is the
Consider the following investment cash flows:
year cash flows
0 (1,000)
1 250
2 400
3 500
4 600
5 600
A). what is the return expected on his investment measured in dollar terms if the opportunity cost rate is 10%?
B). Provide an explanation, in economic terms, of your answer.
C). What is return on this investment measured in percetage terms?
D). Should this investment be made? Explain the answer.
Part II
Several years ago the value line investment reported the following market betas for the stocks of selected healthcare providers.
company beta
Quorum Health 0.90
Beverly Enter 1.20
HealthSouth 1.45
United Health 1.70
The risk free rate and the required rate of return R(rm) were 6.5% and 13.5%
a). What are required rates of return on the four stocks?
b). Why do their required rates of return differ?
c). Suppose that a person in is planning to invest in the only one stock rather that a well0diversified stock portfolio. Are the required rates of return calculated above applicable to the investment? explain possible answer.
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