You are considering acquiring a firm that you believe can generate expected cash flows of $12,000 a
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Question:
| 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 .6. How much is the firm worth if the risk-free rate is 3% and the expected rate of return on the market portfolio is 8%?(Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Value of the firm | $ |
| b. | How much is theovervalue of the firm if its beta is actually 1.0?(Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Overvalue | $ |
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