Problem 1: Use CAPM methodology to compute the following:
A. Compute a fair rate of return for Intel common stock with a beta of 1.2. The risk free rate is 6% and the NYSE market portfolio has an expected return of 16%.
B. Why is the rate you computed a fair rate?
Problem 2: The Niagra corporation is considering two mutually exclusive projects. Both require an initial outlay of $10,000 and will operate for 5 years. Project A will produce expected cash flows of $5,000 per year for years 1 through 5 and project B will produce expected cash flows of $6,000 per year for years 1 through 5. Management of Niagra believes that project B is the riskier project and therefore assigns a required rate of return of 15% to its evaluation and only a 12% required rate of return to project A. Calculate each projects risk-adjusted net present value. (be sure to show your work)
Problem 3: Explain how simulation works. What is the value in using a simulation approach?