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Value of the firm in (a) shown here:

(b) If the firm went short $ B times the value of the firm in (a) of the market portfolio, and invested the proceeds in riskless debt, then what would be the hedged firm's beta? What would be its expected return, and what would be the market value of the firm? (20 points) 1. Suppose the CAPM holds, Rf =4%, and the expected return on the market portfolio is 6%. Assume continuous compounding. A company will sell 1 unit of gold a year from today. Assume the mean price of gold will be $100, and the standard deviation of the cash flow be $20. Assume that the gold B = .9. (a) Find the value of the firm if it did no hedging. (10 points) Answer: V = E(] exp[-(Rp +B - (E[M] Rp))]. Therefore, firm value equals 94.365. = (b) If the firm went short $ B times the value of the firm in (a) of the market portfolio, and invested the proceeds in riskless debt, then what would be the hedged firm's beta? What would be its expected return, and what would be the market value of the firm? (20 points) 1. Suppose the CAPM holds, Rf =4%, and the expected return on the market portfolio is 6%. Assume continuous compounding. A company will sell 1 unit of gold a year from today. Assume the mean price of gold will be $100, and the standard deviation of the cash flow be $20. Assume that the gold B = .9. (a) Find the value of the firm if it did no hedging. (10 points) Answer: V = E(] exp[-(Rp +B - (E[M] Rp))]. Therefore, firm value equals 94.365. =

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