You Are Considering Buying Equity In A Firm If You Purchase The Equity In One Year Y 2819398

You are considering buying equity in a firm. If you purchase the equity, in one year you will receive $1.5 million with 40% probability and $1.2 million with 60% probability. Currently the yield on one year T-bills is 4%. Suppose that you require a risk premium of 10% to invest in the equity of this firm. In other words, your minimum required return on this investment is 14%. (a) What is the most you would be willing to pay for the equity? (b) If you pay this, what is the expected rate of return on your investment? (c) What is the standard deviation of the return to your investment in the firm?

Prof. Angela


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