Suppose that Emily plans to use the Discounted Cash Flow (DCF) model combined with the Capital Asset
Question:
Suppose that Emily plans to use the Discounted Cash Flow (DCF) model combined with the Capital Asset Pricing Model (CAPM) to value a firm today that is expected to last for one year.Another analyst has estimated the probability distribution for the firm cash flows (in $millions) at the end of the year, which is illustrated below. The other analyst has also provided the following information:
beta of the cash flows = 0.5
one-year risk free return is 3%
one-year expected market risk premium = 4%
In case you forgot, the CAPM implies that diversified investors expect a return equal to what they can earn on risk free securities plus the beta times the expected market risk premium.
Auditing Cases An Interactive Learning Approach
ISBN: 9780134421827
7th Edition
Authors: Mark S Beasley, Frank A. Buckless, Steven M. Glover, Douglas F Prawitt