Question
The initial required investment for a firm is 3 million dollars. In 4 years the firm will be sold for 15 million dollars. The standard
The initial required investment for a firm is 3 million dollars. In 4 years the firm will be sold for 15 million dollars. The standard deviation of the four-year return on the equity of the firm is 200 percent. The standard deviation of the one-year return on the market is 35 percent. The one year risk-free rate is 6 percent and the one year market rate is 13 percent. The beta of the firm is 1.5. Calculate the minimum 4-year total percentage return that a well diversified investor would accept to earn if he were to invest in this firm. Calculate the minimum 4-year total percentage return that an entrepreneur who would invest all of his wealth in the firm would accept to earn if he were to invest in this firm. Calculate the NPV for a well diversified investor who would put up the 3 million dollars and invest in the firm. Calculate the NPV for an entrepreneur who would invest all of his wealth in the firm while putting up the 3 million dollars to invest in the firm.
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