Question
Suppose you are the CEO of a company and considering whether to start a large project. It will cost the company $19 billion in year
Suppose you are the CEO of a company and considering whether to start a large project. It will cost the company $19 billion in year 0, and generate profits of $9 billion and $12 billion in years 1 and 2, respectively. The risk-free rate is 3 percent, and the expected market return is 5 percent. The companys is 0.8. a) Given the above information, should you start the project? (hint: to find the required rate of return using CAMP.) b) Suppose that the expected market return rises to 8 percent because of the increasing uncertain economic outlook over the next two years. In this case, is it optimal to start the project? (5 points) c) Following the setting of part b. Suppose now the monetary authority lowers the risk-free rate to 1 percent, does it become optimal to start the project? (5 points) d) Following the setting of part c. Now, the CFO of your company informs you that the companys will become 1 if the project is undertaken. In this case, is it optimal to undertake the project? (5 points)
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