You are considering acquiring a firm that you believe can generate expected cash flows of $10,000 a year forever. However, you recognize that those cash flows are uncertain. (LO12-2)
a. Suppose you believe that the beta of the firm is .4. How much is the firm worth if the risk-
free rate is 4% and the expected rate of return on the market portfolio is 11%?
b. By how much will you overvalue the firm if its beta is actually .6?
