You are considering acquiring a firm that you believe can generate expected free cash flows of$8,000 a year forever. However, you recognize that those cash flows are uncertain.a. Suppose you believe that the beta of the firm is 0.4. How much is the firm worth if the risk-freerate is 5% and the expected market risk premium is 9%? (Do not round the discount rate In yourcalculation. Round your answer to the nearest cent.)The value of the firm$ 121212.1b. By how much will you misvalue the firm if its beta is actually 0.5? (Do not round the discountrate In your calculatlon. Do not round Intermedlate calculations. Round your answer to thenearest cent. Enter your answer as positive value.)By underestimating beta, you would overvaluethe finm by $ 6926.41

Answer) Calculation of Value of Firm if Beta is 0.40 Value of firm = Expected Annual frees cash…

Answered: You are considering acquiring a firm…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 6P

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