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April 6th, 2015, 02:22 AM   #1
Joined: Apr 2015
From: Sweden

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problems calculating beta asset and CAP-model


having trouble with these questions. Hope that someone could help me out! These exercises should somehow be done using the CAP-model (2nd one) and depreciation in balance sheet (1st one).

1. A firm could sell an existing machine for 2,2 million €. This equipment was acquired 4 years ago at 4,2 million €. The book value of the machine has been depreciated using straight line depreciation with a 6 year expected life and no salvage value assumed after six years. Income tax rate for the firm is 20%. What is the increase in the firm's free cash flow caused by the selling the existing machine? (Right answer is about 1.1 million euros)

2. The expected free cash flow for the next period of a company's oil exploration is estimated at 450m€. Beta asset is 1,4 with expected annual growth rate 4.0%. The risk free rate of interest is 2% and the market risk premium is 5%. What is the value of the oil exploration division? (Correct answer should be about 9000m€)
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