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  3. a). what is the market risk premium if the risk fr

a). What is the market risk premium if the risk free rate is 5% and the...

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Finance

a). What is the market risk premium if the risk free rate is 5%and the expected market return is given as follows?

State of natureProbabilityReturn
Boom20%30%
Average70%15%
Recession10%5%

b). A firm is evaluating two projects that are mutuallyexclusive with initial investments and cash flows as follows:

Project AProject B
Initial InvestmentEnd-of-Year Cash FlowsInitial InvestmentEnd-of-Year Cash Flows
RM40,000RM 20,000RM 90,000RM 40,000
RM 20,000RM 40,000
RM 20,000RM 80,000

i). Which project should the firm choose if it has a requiredpayback period of two years? Explain your answer.

ii). If the firm's required rate of return is 15%, which projectshould be chosen? Why?

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