Exercise #8

Exercise #8 - 12.5%. Answer: If the systematic risk were...

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1 Finance 351: Financial Management Instructor: Shuming Liu In-Class Exercise 8 Chapter 12 Question 19 You are considering the purchase of real estate that will provide perpetual income that should average $50,000 per year. How much will you pay for the property if you believe its market risk is the same as the market portfolio’s? The T-bill rate is 5%, and the expected market return is
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Unformatted text preview: 12.5%. Answer: If the systematic risk were comparable to that of the market, the discount rate would be 12.5%, the expected market return. Or using CAPM: NOTE: the propertys beta is 1 because its market risk is the same as the market portfolios. The property would be worth: $50,000/0.125 = $400,000 12.5% 5%)-(12.5% * 1 5% ) r-(r r r f m f = + = + =...
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This note was uploaded on 11/18/2011 for the course FIN 351 taught by Professor Li during the Fall '09 term at S.F. State.

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