A project has the following forecasted cash flows: The estimated project beta is 1.5. The market return

Question:

A project has the following forecasted cash flows:

The estimated project beta is 1.5. The market return r_m?is 16 percent, and the risk-free rate r_f?is 7 percent.

a. Estimate the opportunity cost of capital and the project?s PV (using the same rate to discount each cash flow).

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?

d. Explain why this ratio declines.

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...