QUESTIONS

1. What are the reasons why a firm's management should not always evaluate projects with the net present value (NPV) method by direct cash flow discounting methods using a risk-free interest rate?
2. What are the three terms of the time 1 value of the single risky operating cash flow two periods in the future?
3. In the multi-period valuation model, why does the risk-adjusted discount rate need to apply to cash flow at time t, but risk-free rates are applied for the intermediate times under the assumption that the expected value and covariance of the cash flow are known?
4. The market value of a firm at time 1 is $5 million and its estimated beta is 0.4. Suppose that following the adoption of a new capital budgeting project, the required rate of return increases to 9% and the new market value increases to $5.5 million. Using the Capital Asset Pricing Model, what is the required rate of the return for the new project? Assume that the risk-free interest rate is 5% and the expected return on the market is 10%.