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Problem:

You are considering acquiring a firm that you believe can generate expected cash flows of $14,000 a year forever. However, you recognize that those cash flows are uncertain.

Required:

Question 1: Suppose you believe that the beta of the firm is .8. How much is the firm worth if the risk-free rate is 4% and the expected rate of return on the market portfolio is 9%?

Question 2: How much is the overvalue of the firm if its beta is actually 1.1?

Note: Provide support for your underlying principle.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91170580

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