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Business, 18.07.2020 18:01 xXFLUFFYXx

Suppose you are the financial manager of a company and there are three potential project for investment. the risk free rate is 2%. the market risk premium is 6%. The beta of the company is 0.6. You need to invest $100 today for Project A, and project A is expected to provide a cash flow of $6 a share forever. The beta for this project is 0.75.
You need to invest $105 today for Project B, and project B is expected pay $3.5 next year. Thereafter, payment growth is expected to be 3% a year forever. The beta for this project is 0.7.
You need to invest $175 today for project C, and project C is expected to pay $1.25, $3.80, and $3.00 over the next three years, respectively. Starting in year 4 and thereafter, dividend growth is expected to be 3.5% a year forever. The beta for this project is 0.5.

Required:
a. What's the expected return of the market portfolio? And what's the beta for this market portfolio?
b. What is the discount rate for each project?
c. Which project(s) will you invest? And why?

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Answers: 3

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