I am buying a firm with an expected perpetual cash flow of 8

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 I offer for the firm 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.) Present value difference

Solution

When beta is 0, required return = 5%

when beta is 1, retuired return is the market return = 20%

difference = 850/0.05 - 850/0.20 = 12,750