Question

In: Finance

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $70,000...

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $70,000 or $180,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 4%.

a. If you require a risk premium of 12%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest dollar amount.)

Value of the portfolio $

b. Suppose the portfolio can be purchased for the amount you found in (a). What will the expected rate of return on the portfolio be? (Do not round intermediate calculations. Round your answer to the nearest whole percent.)

Rate of return %

c.Now suppose you require a risk premium of 16%. What is the price you will be willing to pay now? (Round your answer to the nearest dollar amount.)

Value of the portfolio $

Expert Solution

a) Ans:- $107,758.62

Calculation:-

Expected cash flow is=Summation of Cash flows*Probability

= 0.5 * $70,000 + 0.5 * 180,000

= $125,000

With a risk premium of 12% over the risk-free rate of 4%, the required rate of return =12%+4%= 16%.

Therefore, the present value of the portfolio = $125,000/1.16 = $107,758.62.

b) Ans:- 16%

Reason:- Since the present value of $107,758.62 is calculated by discounting $125,000 at 16%, hence the expected rate of return will be = 16%

c) Ans:- $104,166.67

Calculation:-

In this case required rate of return = Risk premium +risk free rate

=16%+4%= 20%

The present value of the portfolio = $125,000/1.20 = $104,166.67

Please feel free to ask if you have any query in the comment section

jeff jeffy answered 2 years ago

3. Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either...

3. Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $50,000 with probability 0.6 or $150,000 with probability 0.4. The alternative riskless investment in T-bill pays 5%. (a) If you require a risk premium of 10%, how much will you be willing to pay for the portfolio? (b) Suppose the portfolio can be purchased for the amount you found in (a). What will be the expected rate of return on the portfolio? (c) Now...

5. Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either...

5. Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $70,000 or $200,000 with equal probabilities of .5. The alternative risk-free investment in T-bills pays 6% per year. a) If you require a risk premium of 8% so that the discount rate is 6 + 8 = 14%, how much will you be willing to pay for the portfolio? b) Suppose that the portfolio can be purchased for the amount you found in (a)....

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $50,000...

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $50,000 or $140,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 6%. a. If you require a risk premium of 11%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest dollar amount.) Value of the portfolio $ b. Suppose the portfolio can be purchased for the amount you found in (a). What will...

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $60,000...

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $60,000 or $170,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 6%. a. If you require a risk premium of 10%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest dollar amount.) Value of the portfolio $ b. Suppose the portfolio can be purchased for the amount you found in (a). What will...

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $40,000...

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $40,000 or $120,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 4%. a. If you require a risk premium of 7%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest dollar amount.) b. Suppose the portfolio can be purchased for the amount you found in (a). What will the expected rate of return...

Problem 5-11 Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be...

Problem 5-11 Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $55,200 or $161,100, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 4%. Required: (a) If you require a risk premium of 8.5%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest dollar amount. Omit the "$" sign in your response.) Price $ (b) Suppose the portfolio can be purchased for the...

Consider a perpetuity with the first cash flow at the end of year 1. If the...

Consider a perpetuity with the first cash flow at the end of year 1. If the invested funds of the perpetuity could earn 11% per year and the perpetuity paid $467 per year, what is the present value of the perpetuity? (round to the nearest dollar)

Hampton Industries had $70,000 in cash at year-end 2018 and $21,000 in cash at year-end 2019....

Hampton Industries had $70,000 in cash at year-end 2018 and $21,000 in cash at year-end 2019. The firm invested in property, plant, and equipment totaling $300,000 — the majority having a useful life greater than 20 years and falling under the alternative depreciation system. Cash flow from financing activities totaled +$170,000. Round your answers to the nearest dollar, if necessary. What was the cash flow from operating activities? Cash outflow, if any, should be indicated by a minus sign. $ ...

Consider a project with free cash flow in one year of $146,076 or $198,619, with either...

Consider a project with free cash flow in one year of $146,076 or $198,619, with either outcome being equally likely. The initial investment required for the project is $75,000, and the project's cost of capital is 21%. The risk-free interest rate is 6%. (Assume no taxes or distress costs.) a. What is the NPV of this project? b. Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm. The equity...

different cash flow. given the following cash flow at the end of each year, what is...

different cash flow. given the following cash flow at the end of each year, what is the future value of this cash flow at 3%, 9%, and 18% interest rates at the end of year 7? year 1. $15,000 year 2. $20,000 year 3. $29,000 year4 through 6. $0 year 7. $130,000