A software company Future PLC can invest in either Project C or Project D which have the same initial Year = 0 cost of £275mlm and cash- flows: Project C: £150mln (in Year=1), £250mln (in Year=2) Project D: perpetuity of £25mln (in Year=1) growing at an annual rate of g=7% The problem is, that the firm does not know the risk-adjusted discount rate of Project C but it does know that the cash flow betas are 55 (in Year=1) and 85 (in Year=2). It also knows that Project D has the same risk as a market portfolio, which has an annual return of rm = 15%. Risk-free treasury bonds have an annual return of rf = 5%. Which project should be chosen by the firm?

A software company Future PLC can invest in either Project C or Project D which have the same initial Year = 0 cost of £275mlm and cash- flows: Project C: £150mln (in Year=1), £250mln (in Year=2) Project D: perpetuity of £25mln (in Year=1) growing at an annual rate of g=7% The problem is, that the firm does not know the risk-adjusted discount rate of Project C but it does know that the cash flow betas are 55 (in Year=1) and 85 (in Year=2). It also knows that Project D has the same risk as a market portfolio, which has an annual return of rm = 15%. Risk-free treasury bonds have an annual return of rf = 5%. Which project should be chosen by the firm?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 6P

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