Answer to Question #83880 in Finance for Jay

Question #83880
An investor was originally expecting a 16% return on her portfolio with beta of 1.25 before
the market risk premium decreased from 8% to 6%. Given this change, what return will
now be expected on the portfolio?

Stock A is currently earning a return of 10% and has a beta of 0. 75, whilst Stock B is
earning 15% and has a beta of 1.5. The rate of return on the market is 12% and a risk
free asset yields 5%. According to the CAPM:
a. Stocks A and B are earning equilibrium returns
b. Stock A is overpriced and stock B is underpriced
c. Stock A is underpriced and stock B is overpriced
d. Socks A and B are overpriced

Firm A has a value of £200 million and Firm B has a value of £140 million. M
erging the
two companies would allow cost savings with a present value of £30 million. If Firm A
purchases Firm B for £150 million, how much do the shareholders of firm A gain from this
Expert's answer
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