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 .