1. GE is considering a project which lasts only one year. The project's cost is $16...
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1. GE is considering a project which lasts only one year. The project's cost is $16 million. The cash flow of the project has the following joint distribution with the market portfolio. Market Scenario Great Good Bad Probability 0.25 0.50 0.25 Also, the risk-free interest rate is 6%. Cash flow Next Year of GE's Project $37.3 million $26.3 million $23.3 million Market Net Return (%) 40 20 -20 i) Use direct tracking method to work out: the tracking portfolio, the PV of the project, the NPV, the expected (required) return of the project, the actual return of the project (IRR), the beta of the project's expected return. Plot the expected return and actual return in Mean return-Beta diagram and comment. ii) Use certainty equivalent method to calculate the cash flow's beta of the project and the project's PV. Is the PV consistent with the result in subquestion i)? What is the relationship between the cash flow's beta and the expected return's beta of the project? iii) Based on the expected return's beta you have worked out in subquestion i), use risk- adjusted discount rate (DCF) method to compute the PV again and verify that the result by this approach is consistent with the ones by the previous two approaches. 1. GE is considering a project which lasts only one year. The project's cost is $16 million. The cash flow of the project has the following joint distribution with the market portfolio. Market Scenario Great Good Bad Probability 0.25 0.50 0.25 Also, the risk-free interest rate is 6%. Cash flow Next Year of GE's Project $37.3 million $26.3 million $23.3 million Market Net Return (%) 40 20 -20 i) Use direct tracking method to work out: the tracking portfolio, the PV of the project, the NPV, the expected (required) return of the project, the actual return of the project (IRR), the beta of the project's expected return. Plot the expected return and actual return in Mean return-Beta diagram and comment. ii) Use certainty equivalent method to calculate the cash flow's beta of the project and the project's PV. Is the PV consistent with the result in subquestion i)? What is the relationship between the cash flow's beta and the expected return's beta of the project? iii) Based on the expected return's beta you have worked out in subquestion i), use risk- adjusted discount rate (DCF) method to compute the PV again and verify that the result by this approach is consistent with the ones by the previous two approaches.
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Answer rating: 100% (QA)
To solve this problem well follow the steps outlined in each subquestion i Direct Tracking Method Step 1 Calculate the expected return and standard deviation of the market portfolio The market portfol... View the full answer
Related Book For
Intermediate Financial Management
ISBN: 978-1285850030
12th edition
Authors: Eugene F. Brigham, Phillip R. Daves
Posted Date:
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