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Consider an economy with three states which occur with probability (0.2, 0.4, 0.4). Suppose a firm has a project which generates the state dependent cash flows (100, 200, 200) at t=1.
The investment costs are 170 at t=0. The firm owns this money. The market portfolio generates the payoff (200, 250, 300) and has an expected return of 8%. The risk free rate is 3%. Suppose the CAPM holds.
(a) What is the beta of this project?
(b) Explain whether the firm should conduct the project.
Suppose Real Option Inc. has a product that generates the following cash flow. At t=1, the demand can be high or low with equal probability. If demand is high (low) the cash flo
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premium coupons that already have been expired should be or shouldn''t be estimated as liability?
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