Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. suppose you believe that the venture described in

Suppose you believe that the venture described in Problem 4 can be valued by the...

70.2K

Verified Solution

Question

Finance

Suppose you believe that the venture described in Problem 4 can be valued by the Capital Asset Pricing Model, using data on several public companies that you regard as comparable in terms of market risk, along with some other market information. The following table contains information on the comparable firms. Use the information to estimate the beta of the venture.

Comparable Firm

Equity Beta

Share Price

Shares Outstanding

Book Value of Debt

Firm A

1.85

$12.00

2,650,000

$4,350,000

Firm B

1.60

$8.50

4,750,000

$2,800,000

Firm C

1.42

$20.50

3,280,000

$1,700,000

In addition, you have the following information on interest rates on U.S. government debt and stock market returns:

The current fiveyear Treasury rate is 4.0 percent.

The longrun historical average fiveyear Treasury rate is 4.2 percent.

The S&P 500 historical average annual return 11.7 is percent

The historical standard deviation of market returns is about 14.5 percent per year. (from Table 10.4)

Using the above information, what is your estimate of the required return on assets for the venture?

Explain your reasoning.

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students