Question: The General Construction Company GCC is expecting next year a

The General Construction Company (GCC) is expecting next year a cash flow from assets of €50 million that is expected to grow forever at 3 percent. Its cost of capital is 11 percent. The firm is exposed to the following three risks:
• There is a 10 percent chance that its cost of capital increases to 11.5 percent
• There is a 60 percent chance that its growth rate drops to 1 percent
• There is a 40 percent chance that its cash flow declines to €45 million
a. What is the market value at risk of each one of the events listed above?
b. Indicate if they are high, moderate, or low risk.

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  • CreatedMarch 27, 2015
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