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You are considering acquiring a firm that you believe can generate expected cash flows of $12,000 a year forever. However, you recognize that those cash
You are considering acquiring a firm that you believe can generate expected cash flows of $12,000 a year forever. However, you recognize that those cash flows are uncertain. |
a. | Suppose you believe that the beta of the firm is 0.5. How much is the firm worth if the risk-free rate is 4% and the expected market risk premium is 8%? (Round your answer to the nearest cent.) | |
The value of the firm $ |
b. | By how much will you misvalue the firm if its beta is actually 0.8? (Round your answer to the nearest cent. Enter your answer as positive value.) | |
By underestimating beta, you would (Click to select) undervalueovervalue the firm by $_____ |
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