You have negotiated a deal with an electric car manufacturer to open one of its dealerships in your hometown. The terms of the contract specify that you must open the dealership either immediately or in exactly one year. If you do neither, you lose the right to open the dealership at all. Suppose the current value of a dealership is $5 million and the first-year free cash flow is expected to be $500,000. Assuming a cost of capital to be 12%, the future cash flows are expected to grow at a rate of 2% per year, risk-free rate of 5% and a volatility of 40%

(i) What is the beta of a corporation whose only assess is a one-year option to open a dealership?  (ii) What is the beta if the first year's cash flows are expected to be $700,000, so a working dealership is worth $7 million?

Answer rating: 100% (QA)

To calculate the beta of a corporation whose only asset is a oneyear option to open a dealership we ... View the full answer