Please i would really be thankfull to u … to find out how u came to ur calculations thankyou Consider a project that costs $100,000. The project may succeed with probability 0.5 or may fail with probability 0.5. If the project succeeds, it yields a cash-flow of $120,000. If it fails, it yields a cash-flow of $90,000. The project has a beta of 1.2. The risk-free rate is 4% and the expected return on the market is 10%. a) What are the project’s expected, realized, and required returns? b) How much would an investor be willing to pay for the cash-flow stream, given the project’s beta? c) What is the project’s NPV?
Isn’t there some timeframe given in the question somewhere?
no i am really sorry it was given to me like this …
Arent B and C the same thing? An investor would not pay more than NPV, so NPV is the answer for both, unless I forget some little spin that they put on this… Let me attempt to answer: Expected return: 4.49% Realized: I dont really know what this is asking Required: Well Market required, based on Beta is 11.2% B & C NPV = 4,496
quorky I believe Joey’s question about the time frame of the investment is required to answer the NPV question. At the project’s Beta Expected return for investor = 4 + 1.2 (10-4) = 11.2% With a 1 year time horizon for the investment: NPV = -100000 + 105000/(1.112) = -5575 105000 = 120000*.5 + 90000 *.5 Not sure where you got the NPV of 4496 from. CP
Sorry, I assumed the time at 1 year (I thought I stated that assumption, but I guess I forgot)… Also I agree with your answer, I was doing it quickly and just subtracted the initial investment from the expected value. So, my answer was wrong… I agree with CPK… Now that I look at it, the question starts to make even less sense… I feel embarrassed (and I am a Level 3 Candidate ;o)…)
I think this is a messed up question.
This is what they do to us at school !! teach us less and expect us to do much more then that … which is not our level i am a BBA student in last year specializing in finacne !! Well iam new here … thanks everyone fo being so coperative i intend to sit for CFA next here !! Sunny (BI norwegian school of management) Norway …