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How does firm value change with riskiness

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Reference no: EM133058292

Suppose you have firm with perpetual cashflows of $10,000,000 a year. Consider five hypothetical risk levels and five hypothetical expected returns by investors according to the following table:

Risk level

1

2

3

4

5

Expected return

0.06

0.08

0.1

0.12

0.15

Prepare to discuss the following in the live session:

  • Why do investors expect higher returns for riskier cash flows?
  • Provide the value of the firm under each of the hypothetical risk level.
  • How does firm value change with expected return of the cashflows?
  • How does firm value change with riskiness of cash flows?
  • Will the expected return change if investors can invest in other firms? How?

Reference no: EM133058292

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