Chapter 11 Solutions - Problem 11-1 Assumptions Investment...

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Problem 11-1 Assumptions Investment $5,000,000 Expected Cash Flow at Harvest $20,000,000 Years to Harvest 4 Standard Deviation of Holding Period Returns 120% Correlation with Market 0.3 One-year Standard Deviation of Market 14% Annual Risk-Free Rate 4% Expected Annual Return on Market Portfolio 11% a. Venture Beta Holding Period Standard Deviation of Market 28.0% Beta of Venture 1.29 b. Required Rate of Return to Well-Diversified Investor Holding Period Risk-Free Rate 17.0% Expected Holding Period Return of Market 51.8% CAPM Required Holding Period Return 61.8% Annualized 12.8% c. Required Rate of Return to Full-Commitment Investor Required Holding Period Return 166.2% Annualized 27.7% d. Value to a Well-Diversified Investor Present Value 12,364,306 $ Net Present Value 7,364,306 e. Value to Full-Commitment Investor Present Value 7,512,598 $ Net Present Value 2,512,598 $
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Problem 11-2 Assumptions Investment $1,500,000 Expected Cash Flow at Harvest $3,200,000 Years to Harvest 2 Standard Deviation of Cash Flows $2,000,000 Correlation with Market 0.2 One-year Variance of Market Returns 4% Annual Risk-Free Rate 7.0% Expected Annual Return on Market Portfolio 13.5% a. CEQ Form of CAPM - Diversified Investor Holding Period Standard Deviation of Market 28.3% Holding Period Risk-Free Rate 14.5% Holding Period Market Return 28.8% Holding Period Market Risk Premium 14.3% Risk Adjustment to Expected Cash Flow $202,692 Certainty Equivalent Cash Flow $2,997,308 Present Value $2,617,965 Net Present Value $1,117,965 b. RADR Form of CAPM - Diversified Investor Equilibrium Standard Deviation of Holding Period Returns 76.4% Beta 0.54 Holding Period Required Rate of Return 22.2% Present Value $2,617,965 Net Present Value $1,117,965 c. CEQ Form of CAPM - Full Commitment Risk Adjustment to Expected Cash Flow $1,013,461 Certainty Equivalent Cash Flow $2,186,539 Present Value $1,909,808 Net Present Value $409,808 d. RADR Form of CAPM - Full Commitment Equilibrium Standard Deviation of Holding Period Returns 104.7% Holding Period Required Rate of Return 67.6% Present Value $1,909,808 Net Present Value 409,808 $
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Assumptions Assumptions Market std.dev. 20% Market std.dev. 20% Venture std.dev. 80% Venture std.dev. 80% Correlation 0.4 Correlation 0.1 Risk-free rate 4% Risk-free rate 4% Market return 10.5% Market return 10.5% Market risk premium 6.5% Market risk premium 6.5% a. 40% in venture, 60% in market c. 40% in venture, 60% in market Portfolio standard deviation (Equation 10.6) Portfolio standard deviation (Equation 10.6) 38.41% 35.28% Portfolio required return (Equation 10.1) Portfolio required return (Equation 10.1) 16.48% 15.47% Venture required return (Equation 10.8) Venture required return (Equation 10.8) 25.46% 22.92% b. 20% in venture, 80% in market d. 20% in venture, 80% in market Portfolio standard deviation (Equation 10.6) Portfolio standard deviation (Equation 10.6) 26.77% 23.73% Portfolio required return (Equation 10.1) Portfolio required return (Equation 10.1)
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This note was uploaded on 02/19/2012 for the course FIN 124 taught by Professor Jackson during the Spring '05 term at University of Texas at Dallas, Richardson.

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Chapter 11 Solutions - Problem 11-1 Assumptions Investment...

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