Question 7

Suppose an investor invested $400 in a project that is expected to generate revenue of $440 a year later. The required rate of returnis the minimumreturnan investor expects to achieve by investing in a project. The required rate of return is influenced by the following factors:the risk-free rate of return is 4% , the expected return from the market is 8%, and beta is 1.5.

1-What is the required rate of return for this project?

2-How much therate of return on this project?

3-Howmuch value does this project add to the book value?

4-What is present value of the project at the end of the year?

5-How much is the residual earnings?

6-If the required rate of return (cost of capital) for the project is 12%, do you think the project is making a profit or loss? Explain your answer?

7-If the project were to generate revenues of $448, how much is the residual earnings? (assume that the requiredrate of return for the project is 10 percent)

8-If the project for one-period with an expected rate of return of 10 percent, what is the value of the project? (use the residual earnings model)

9-If the project were expected to earn at a 12 percent rate, , what is the value of the project?