Suppose you believe that the venture described in Problem 4 can be valued by the...
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Finance
Suppose you believe that the venture described in Problem 4 can be valued by the Capital Asset Pricing Model, using data on several public companies that you regard as comparable in terms of market risk, along with some other market information. The following table contains information on the comparable firms. Use the information to estimate the beta of the venture.
Comparable Firm
Equity Beta
Share Price
Shares Outstanding
Book Value of Debt
Firm A
1.85
$12.00
2,650,000
$4,350,000
Firm B
1.60
$8.50
4,750,000
$2,800,000
Firm C
1.42
$20.50
3,280,000
$1,700,000
In addition, you have the following information on interest rates on U.S. government debt and stock market returns:
The current fiveyear Treasury rate is 4.0 percent.
The longrun historical average fiveyear Treasury rate is 4.2 percent.
The S&P 500 historical average annual return 11.7 is percent
The historical standard deviation of market returns is about 14.5 percent per year. (from Table 10.4)
Using the above information, what is your estimate of the required return on assets for the venture?
Explain your reasoning.
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