If the risk-free rate equals 4% and a stock with a beta of 0.75 has an expected return of 10%, what is the expected return on the market portfolio?
The cash flows associated with three different projects are as follows:
Cash flows Alpha (4 in millions) Beta ($ in millions) Gamma ($ in millions)
Initial Outflow -1.5 -0.4 -7.5
Year 1 0.3 0.1 2.0
Year 2 0.5 0.2 3.0
Year 3 0.5 0.2 2.0
Year 4 0.4 0.1 1.5
Year 5 0.3 -0.2 5.5
a. Calculate the payback period of each investment
b. Which investments does the firm accept if the cutoff payback period in three years? Four years?
c. If the firm invests by choosing projects with the shortest payback period, which project would it invest in?