offer for the firm I am buying a firm with an expected perpe

offer for the firm I am buying a firm with an expected perpetual cash flow of $850 but am unsure of its risk. If I think the beta of the firm is zero, when the beta is really 1, how much more will than it is truly worth? Assume the risk-free rate is 5% and the expected rate of return on the market is 20%. (Input the amount as a positive value.) nini Present value difference

Solution

when beta is 0, value = 850/0.05 = 17,000

when beta is 1, value = 850/0.20 = 4,250

difference = 17,000 - 4,250 = 12,750