Question

1) You are a consultant to a large manufacturing corporation considering a project with the following net after-tax cash flows (in millions of dollars): Years from Now After-Tax CF 0 –28 1–9 14 10 28 The project's beta is 1.4. Assuming rf = 5% and E(rM) = 15% a. What is the net present value of the project? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Net present value million b. What is the highest possible beta estimate for the project before its NPV becomes negative? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Highest possible beta value

2) Consider the following information: Portfolio Expected Return Standard Deviation Risk-free 5.0 % 0 % Market 13.6 38 A 11.6 27 a. Calculate the Sharpe ratios for the market portfolio and portfolio A. (Round your answers to 2 decimal places.) Sharpe Ratio Market portfolio Portfolio A b. If the simple CAPM is valid, is the above situation possible? Yes No

Answer 1

1)