Problem: CAPM and Valuation. You are considering acquiring a firm that you believe can generate expected cash flows of $10,000 a year forever. However, you recognize that those cash flows are uncertain.
Q1. Suppose you believe that the beta of the firm is .4. How much is the firm worth if the risk free rate is 4 percent and the expected rate of return on the market portfolio is 12 percent?
Q2. By how much will you overvalue the firm if its beta is actually .6?