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    CAPM, risk-adjusted net present value, simulation

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    Problem 1
    Use CAPM methodology to compute the following:

    A. Compute a fair rate of return for Intel common stock with a beta of 1.2. The risk free rate is 6% and the NYSE market portfolio has an expected return of 16%.

    B. Why is the rate you computed a fair rate?

    Problem 2
    The Niagra corporation is considering two mutually exclusive projects. Both require an initial outlay of $10,000 and will operate for 5 years. Project A will produce expected cash flows of $5,000 per year for years 1 through 5 and project B will produce expected cash flows of $6,000 per year for years 1 through 5. Management of Niagra believes that project B is the riskier project and therefore assigns a required rate of return of 15% to its evaluation and only a 12% required rate of return to project A. Calculate each projects risk-adjusted net present value. (be sure to show your work)

    Problem 3

    Explain how simulation works. What is the value in using a simulation approach?

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    https://brainmass.com/business/net-present-value/capm-risk-adjusted-net-present-value-simulation-220101

    Solution Preview

    The answers are also in the attached file:
    Problem 1
    Use CAPM methodology to compute the following:

    A. Compute a fair rate of return for Intel common stock with a beta of 1.2. The risk free rate is 6% and the NYSE market portfolio has an expected return of 16%.

    CAPM (Capital Asset Pricing Model) equation is:
    r A= r f + beta A (r m - r f)

    risk free rate= r f = 6%
    beta of stock= beta A= 1.2
    return on market portfolio= r m = 16% (NYSE market portfolio)
    required return on stock r A = to be determined
    Plugging in the values
    r A = 18. % =6.%+1.2*(16.%-6.%)

    Answer: fair rate of return= 18. %

    B. Why is the rate you computed a fair rate?

    The rate that has been computed is a fair rate of return because it takes into account the systematic risk (as measured by beta) of intel stock.

    Problem 2
    The Niagra corporation is considering two mutually exclusive projects. Both require an initial outlay of $10,000 and will operate for 5 years. Project A will produce expected cash flows of $5,000 per year for years 1 through 5 and project B will produce expected cash flows of $6,000 per year for years 1 through 5. Management of Niagra believes that project B is the ...

    Solution Summary

    Three questions on CAPM, risk-adjusted net present value, simulation have been answered.

    $2.19

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