Assume that the risk-free rate is 5% and the equity premium is 2%. A $1 billion firm
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Assume that the risk-free rate is 5% and the equity premium is 2%. A $1 billion firm with a beta of 2 has just sold one of its divisions for a fair price of $200 million. The CEO is concerned that investors expect the firm to earn 9%, and so believes keeping the money in short-term Treasuries that only pay 5% would be a bad idea. Is it really a bad idea?
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