A project has the following forecasted cash flows: Cash Flows ($ thousands) C0 C1 C2 C3 −180 +120 +140 +130 The estimated beta is 1.56. The market return is 16%, and the risk-free rate is 4%. a. Estimate the cost of capital for the project and the project’s PV. b. What are the certainty equivalent cash flows in each year? c. What is the ratio of the certainty-equivalent cash flow to the expected cash flow in each year?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
A project has the following
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