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Assignment on west coast body art

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Reference no: EM133114349

Assume you are the president of a large investment banking firm. On a whim, you decide to purchase a company named West Coast Body Art. The company is the largest manufacturer of clip-on nose and eyebrow rings in Utah.

You have determined that West Coast Body Art is likely to generate a perpetual annual cash flow of $2,000,000. You estimate the firm's CAPM beta to be 0.75, but the true beta is really 1.25. Assume the risk free rate is 4%, and the expected return on the market is 10%. Assume the firm pays no taxes. Be sure to show all of your work.

A. How much will you pay for the firm using your beta estimate of 0.75?

B. Comparing the value of the firm from part A to the value of the firm obtained by using the true beta of 1.25, how much more will you pay for the firm than it is truly worth?

Reference no: EM133114349

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