I am suppose to write a 1400 word paper based on the purchase of three new trucks costing $30,000 each and $10,000 of equipment for each one, with the life expansion of the trucks to be 5 years by calculating the firms' required return using the capital asset pricing model and the following assumptions of Beta = 3.0, Risk-Free rate = 2.5% and Return on the market portfolio = 9.5% with a 20% cash down payment and financed with payments of $650 per month over 5 years, with the expected generate additional annual cash flows for year 1 = 9,200, year 2= 12,800, year 3 = 15,000, year 4= 18,000 and year 5 = 20,000

Question

I am suppose to write a 1400 word paper based on the purchase of three new trucks costing $30,000 each and $10,000 of equipment for each one, with the life expansion of the trucks to be 5 years by calculating the firms' required return using the capital asset pricing model and the following assumptions of Beta = 3.0, Risk-Free rate = 2.5% and Return on the market portfolio = 9.5% with a 20% cash down payment and financed with payments of $650 per month over 5 years, with the expected generate additional annual cash flows for year 1 = 9,200, year 2= 12,800, year 3 = 15,000, year 4= 18,000 and year 5 = 20,000

Answer 1

To calculate the required return using the Capital Asset Pricing Model (CAPM), you will need the following information:

1. Beta (β): This measures the stock's sensitivity to market movements and indicates the stock's risk relative to the overall market.

2. Risk-Free Rate: This represents the return on a risk-free investment, typically the yield on government bonds. It provides a baseline return for investors.

3. Return on the Market Portfolio: This is the average return of the overall market, such as the S&P 500. It represents the average return of all risky assets.

4. Cash Down Payment: This is the initial amount of money paid upfront when purchasing the trucks.

5. Monthly Payments: This is the monthly payment amount over the 5-year financing period.

6. Additional Annual Cash Flows: These are the expected cash flows generated by the trucks each year.

Now, let's break down the calculation step by step:

Step 1: Calculate the cost of each truck and equipment:
- Cost of each truck: $30,000
- Cost of equipment per truck: $10,000
- Total cost per truck: $30,000 + $10,000 = $40,000

Step 2: Calculate the down payment:
- Cash down payment: 20% of total cost = 0.2 * $40,000 = $8,000

Step 3: Calculate the loan amount:
- Loan amount: Total cost - Down payment = $40,000 - $8,000 = $32,000

Step 4: Calculate the total interest paid over the loan period:
- Total interest paid: Monthly payment * Number of months - Loan amount
- Number of months: 5 years * 12 months = 60 months
- Total interest paid: $650 * 60 months - $32,000

Step 5: Calculate the annual cash flows:
- Year 1: $9,200
- Year 2: $12,800
- Year 3: $15,000
- Year 4: $18,000
- Year 5: $20,000

Step 6: Calculate the net cash flows for each year:
- Net cash flow = Cash flow - Monthly payment * 12

Step 7: Calculate the required return (RR) using CAPM:
- RR = Risk-Free Rate + Beta * (Return on the Market Portfolio - Risk-Free Rate)

Substitute the given values:
- Beta (β) = 3.0
- Risk-Free Rate = 2.5%
- Return on the Market Portfolio = 9.5%

Now, you have all the necessary information to calculate the required return and write your paper. Remember to explain each step and provide appropriate analysis throughout your paper. Good luck!