Corporate Finance Questions, Chapter 12, Capm

Assignment Chapter 12

#5

a) Yes, you should buy it, because r should be equal 10%, when using CAPM, and it is higher

R=4%+0.6*(14%-4%) + 10%

b) No, Because R=1.6*(14%-4%)=20%. By given Beta it should bring more return on investment, then 14%

c) Because Beta shows the amount of risk, and in the second case Beta is higher, but it brings the same return as market portfolio.

In the first case the risk is lower than risk of market portfolio but it brings an equal return.

#13

NPV= -CF +110PVCF=- 100 + 5.019*15 = - 25 , NPV is lower 0, reject the project

R=4%+1.4*(12%-4%)= 15.2%

#14

0= -100 + PFIVA*15

PFIVA= 100/15 = 6.67

IRR = 7.2%

The accept-reject decision using IRR agree with the decision using NPV, because IRR lower than cost of capital. You should reject the project.

#18

Beta = 1

R =10 %

Rf= 4%

a)

8% = 4x + 10 (1-x)

8 = 4x + 10 -10x

-2=-6x

X = 0.333 33% risk free T-bills and 67% S&P

b)

Beta = 0.4 = (wx1) + (1-w)*0 w=0.4

S&P should be 40% and T-bills 60%

c) Beta = (0.667x1) + (0.333 x 0) = 0.667

Risk premium = rm-rf =( E (Rx) – rf) /Beta =(8%-4%)/ 0.667 = 6%

Portfolio b: E (r) = (0.4x10%) + (0.6x4%) = 6.4%

Risk premium = (6.4%-4%)/0.4= 6%

Both portfolios have the same risk premium to Beta