Economics Appendix E Homework The expected return of the new project

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Appendix 12D Techniques for Measuring Beta Risk

Answers and Solutions

12D-1

Web Appendix 12D

Techniques for Measuring Beta Risk

Answers to Questions

12D-1 Estimating project betas is even more difficult, and more fraught with uncertainty, than estimating

stock betas. The pure play method would be used in a situation when the firm is considering a

major investment outside its primary field, and it can identify several companies whose only

business is to produce the product in question. However, it may be impossible to find single-

12D-2

Answers and Solutions

Appendix 12D Techniques for Measuring Beta Risk

Solutions to Problems

12D-1 bA = 0.8; bB = 1.5; rRF = 5%; RPM = 6%; 100% equity.

bFirm = (0.5)0.8 + (0.5)(1.5)

12D-2 Interstate:

wd = 50%; wc = 50%; IRRNew project = 14%; wd Project = 50%; wc Project = 50%; rd = 12%.

Pure-play proxy firm:

b = 1.38; wd = 50%; wc = 50%.