Question

Suppose you are the financial manager of a company, and there are three potential projects for investment. The risk free rate is 2%. The market risk premium is 6%. The beta of the company is 0.6.

You need to invest $100 today for Project A, and project A is
expected to provide a cash flow of $6 a share forever. The beta for
this project is 0.75.

You need to invest $105 today for Project B, and project B is
expected pay $3.5 next year. Thereafter, payment growth is expected
to be 3% a year forever. The beta for this project is 0.7.

You need to invest $175 today for project C, and project C is
expected to pay $1.25, $3.80, and $3.00 over the next three years,
respectively. Starting in year 4 and thereafter, dividend growth is
expected to be 3.5% a year forever. The beta for this project is
0.5.

(a1) What's the expected return of the market portfolio? And
what's the beta for this market portfolio?

(a2) What is the discount rate for each project?

(a3) which project(s) will you invest? And why?

Answer #1

Suppose you are the financial manager of a company, and there
are three potential projects for investment. The risk free rate is
2%. The market risk premium is 6%. The beta of the company is
0.6.
You need to invest $100 today for Project A, and project A is
expected to provide a cash flow of $6 a share forever. The beta for
this project is 0.75.
You need to invest $105 today for Project B, and project B is...

Suppose you are the financial manager of a company, and there
are three potential projects for investment. The risk free rate is
2%. The market risk premium is 6%. The beta of the company is
0.6.
You need to invest $100 today for Project A, and project A is
expected to provide a cash flow of $6 a share forever. The beta for
this project is 0.75.
You need to invest $105 today for Project B, and project B is...

Suppose you are the financial manager of a company, and there
are three potential projects for investment. The risk free rate is
2%. The market risk premium is 6%. The beta of the company is
0.6.
You need to invest $100 today for Project A, and project A is
expected to provide a cash flow of $6 a share forever. The beta for
this project is 0.75.
You need to invest $105 today for Project B, and project B is...

Consider the following three stocks: Stock A is expected to
provide a dividend of $11.10 a share forever. Stock B is expected
to pay a dividend of $6.10 next year. Thereafter, dividend growth
is expected to be 5.00% a year forever. Stock C is expected to pay
a dividend of $4.90 next year. Thereafter, dividend growth is
expected to be 21.00% a year for five years (i.e., years 2 through
6) and zero thereafter.
a-1. If the market capitalization rate...

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