The expected rate of return on the market portfolio

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You are considering acquring a firm that you believe can generate expected cash flow of $22,000 a year forever. However, you recognize that those cash flows are uncertain.

a. suppose you believe that the beta of the firm is 1.6. How much is the firm worth if the risk-freee rate is 4% and the expected rate of return on the market portfolio is 8%? (Do not round intermediate calcualtions. Round your answer to 2 decimal places)

value of the firm $ __________

b. by how much will you overvalue the firm if its beta is actually 1.8? (Do not round intermediate calculations. Round your answer to 2 decimal places)

Overvaluation $____________

Reference no: EM131187911

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