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P8 – 26 Manipulating CAPM Use the basic equation for the capital asset pricing model( CAPM) to work each of the following problems.
a. Find the required return for an asset with a beta of 0.90 when the risk-free rate and market return are 8 % and 12 %, respectively.
b. Find the risk-free rate for a firm with a required return of 15 % and a beta of 1.25 when the market return is 14 %.
c. Find the market return for an asset with a required return of 16 % and a beta of 1.10 when the risk-free rate is 9 %.
d. Find the beta for an asset with a required return of 15 % when the risk-free rate and market return are 10 % and 12.5 %, respectively.
P5 – 1 Using a time line The financial manager at Starbuck Industries is considering an investment that requires an initial outlay of $ 25,000 and is expected to result in cash inflows of $ 3,000 at the end of year 1, $ 6,000 at the end of years 2 and 3, $ 10,000 at the end of year 4, $ 8,000 at the end of year 5, and $ 7,000 at the end of year 6.
a. Draw and label a time line depicting the cash flows associated with Starbuck Industries’ proposed investment.
b. Use arrows to demonstrate, on the time line in part a, how compounding to find future value can be used to measure all cash flows at the end of year 6.
c. Use arrows to demonstrate, on the time line in part b, how discounting to find present value can be used to measure all cash flows at time zero.
d. Which of the approaches— future value or present value— do financial managers rely on most often for decision making? Why?
P5 – 4 Future values For each of the cases shown in the following table, calculate the future value of the single cash flow deposited today at the end of the deposit period if the interest is compounded annually at the rate specified.