You are considering acquiring a firm that you believe can generate expected cash flows of $ 10,000 a year forever. However, you recognize that those cash flows are uncertain. A) Suppose you believe that the beta of the firm is 0.4. The risk-free rate is 4% and the expected rate of return on the market portfolio is 11%. Calculate the discount rate using CAPM and the value of the firm. Discount Rate Value of firm B) If the beta of the firm is actually 0.6, by how much did you overvalue the firm by underestimating beta? Discount Rate New Value of firm Amount by which you would have overvalued the firm If the risk-free rate is 6% and the expected rate of return on the market portfolio is 13%, is a security with a beta of 1.25 and an expected rate of return of 16% overpriced or underpriced? Use CAPM. Under/overpriced? Required Return Explain