subject: corporate finance

Read the questions carefully and answer them. Your solutions must delineate how you reach the final answer.

Marriott's restaurant division opens new shops, which cost 1 million. The new shops yield cash flows, which have the following joint distribution with the market return: Market Scenario Probability Bad Good Great .25 .50 25 Market return (%) -15 10 20 Year 1 cash flow forecast $0.8 million $1.2 million $1.5 million Assume that CAPM holds. Respond to (a) through (e). (a) Compute the expected year 1 cash flow for Marriott. (b) Compute the returns from new shops in each case. (c) Find the covariance of the new shops' returns with the market return and its beta. (d) Assume that the risk-free rate is 3%. Compute the expected return using the beta found in (c) and find the PV of the year 1 cash flow by discounting it with the expected return. (e) Discuss why the beta in (c) and the PV in (d) are inapproprate evaluations. (Hint: under CAPM, the securities are fairly priced.) Marriott's restaurant division opens new shops, which cost 1 million. The new shops yield cash flows, which have the following joint distribution with the market return: Market Scenario Probability Bad Good Great .25 .50 25 Market return (%) -15 10 20 Year 1 cash flow forecast $0.8 million $1.2 million $1.5 million Assume that CAPM holds. Respond to (a) through (e). (a) Compute the expected year 1 cash flow for Marriott. (b) Compute the returns from new shops in each case. (c) Find the covariance of the new shops' returns with the market return and its beta. (d) Assume that the risk-free rate is 3%. Compute the expected return using the beta found in (c) and find the PV of the year 1 cash flow by discounting it with the expected return. (e) Discuss why the beta in (c) and the PV in (d) are inapproprate evaluations. (Hint: under CAPM, the securities are fairly priced.)