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 return is the minimum return an 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 the rate of return on this project?

3- How much 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 required rate 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?