2. The price of a stock, Aurum, is currently £40. The stock has an expected return of 13%. The risk free rate is 7% and the market risk premium 8%. Aurum is considering a new project, with a risk profile similar to the rest of the firm. Based on the cash flows provided in the table below, calculate the NPV of the project. Years from now After tax cash flow (millions £) 0 1 2 3 -20 10 10 20 Calculate the beta of this stock. If the beta of the stock suddenly doubles, what will be the new market price? Assume that the dividend stream is constant and that all else remains equal. Name two of the main assumptions needed to derive CAPM. Many people have critiqued the CAPM as not a good fit to the data. Discuss how the CAPM can be adjusted to improve the model.

2. The price of a stock, Aurum, is currently £40. The stock has an expected return of 13%. The risk free rate is 7% and the market risk premium 8%. Aurum is considering a new project, with a risk profile similar to the rest of the firm. Based on the cash flows provided in the table below, calculate the NPV of the project. Years from now After tax cash flow (millions £) 0 1 2 3 -20 10 10 20 Calculate the beta of this stock. If the beta of the stock suddenly doubles, what will be the new market price? Assume that the dividend stream is constant and that all else remains equal. Name two of the main assumptions needed to derive CAPM. Many people have critiqued the CAPM as not a good fit to the data. Discuss how the CAPM can be adjusted to improve the model.

Name: 2. The price of a stock, Aurum, is currently £40. The stock has an ex
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Description: 2. The price of a stock, Aurum, is currently £40. The stock has an expected return of 13%.The risk free rate is 7% and the market risk premium 8%.(a)Aurum is considering a new project, with a risk profile similar to therest of the firm. Based on the

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 6P

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