Question

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten...

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 5.5 percent, the expected return on the market is 12.8 percent, and the betas of the two stocks are 1.7 and 0.9, respectively. Stevens’s own forecasts of the returns on the two stocks are 17.00 percent for Furhman Labs and 11.50 percent for Garten.

a. Calculate the required return for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

b. Is each stock undervalued, fairly valued, or overvalued?

Furhman Labs:

Garten Testing:

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

a. Required return of Furhman Labs is computed as shown below:

= Risk free rate + Beta x (return on market - risk free rate)

= 5.5% + 1.7 x (0.128 - 0.055)

= 17.91%

Required return of Garten Testing is computed as shown below:

= Risk free rate + Beta x (return on market - risk free rate)

= 5.5% + 0.9 x (0.128 - 0.055)

= 12.07%

b. Since the returns of both stocks as computed in part a above is greater than the forecasted return, hence both the stocks are overvalued.

Feel free to ask in case of any query relating to this question      

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Expected return on two stocks for two particular market returns: Market Return            Aggressive Stock        Defensive Stock...
Expected return on two stocks for two particular market returns: Market Return            Aggressive Stock        Defensive Stock 5%                               2%                               8% 20%                             25%                             20% What are the betas of the two stocks? What is the expected rate of return on each stock if the market return is equally likely to be 5% or 20%? If the T-bill rate is 4% and the market return is equally likely to be 5% or 20%, draw the SML for this economy. Between aggressive and defensive...
Expected return on two stocks for two particular market returns:                         Market Return      
Expected return on two stocks for two particular market returns:                         Market Return         Aggressive Stock         Defensive Stock                                  5%                           0%                               6%                                30%                          40%                             20% What are the betas of the two stocks? What is the expected rate of return on each stock if the market return is equally likely to be 5% or 30%? If the T-bill rate is 4.5% and the market return is equally likely to be 5% or 30%, draw the SML for this economy....
Expected return on two stocks for two particular market returns: Please show all work.                         Market...
Expected return on two stocks for two particular market returns: Please show all work.                         Market Return            Aggressive Stock        Defensive Stock                         5%                               1%                               8%    20%                             25%                             18% What are the betas of the two stocks? What is the expected rate of return on each stock if the market return is equally likely to be 5% or 20%? If the T-bill rate is 3% and the market return is equally likely to be 5% or 20%, draw the SML...
1. Expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive...
1. Expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive Stock 2% -5% 3% 22% 35% 15% a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the market return is equally likely to be 2% or 22%? c. If the T-bill rate is 3% and the market return is equally likely to be 2% or 22%, draw the SML for this economy....
1. Expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive...
1. Expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive Stock 2% -5% 3% 22% 35% 15% a. What are the betas of the two stocks? b. What is the expected rate of return on each stock if the market return is equally likely to be 2% or 22%? c. If the T-bill rate is 3% and the market return is equally likely to be 2% or 22%, draw the SML for this economy....
Q3) Consider the following table, which gives a security analyst’s expected return on two stocks in...
Q3) Consider the following table, which gives a security analyst’s expected return on two stocks in two particular scenarios for the rate of return on the market. Assume that both scenarios are equally likely to happen (i.e., probability of scenario 1 = probability of scenario 2=0.5). Q4) You are considering investing in stock S and you want to know how stock S is related to the market portfolio M. Given your research, you discovered the following information: Expected Return Standard...
Consider the following table, which gives a security analyst's expected return on two stocks for two...
Consider the following table, which gives a security analyst's expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive Stock 7 % 3.7 % 5.5 % 20 30 14 a. What are the betas of the two stocks? (Round your answers to 2 decimal places.) b. What is the expected rate of return on each stock if the market return is equally likely to be 7% or 20%? (Round your answers to 2 decimal places.)...
Expected return on two stocks for two particular market returns:                         Market Return      &
Expected return on two stocks for two particular market returns:                         Market Return             Aggressive Stock        Defensive Stock                         5%                               -2%                             6% 25%                             38%                             12% What are the betas of the two stocks (Hint: compute each stock’s beta by calculating the difference in its return across the two scenarios divided by the difference in the market return)? What is the expected rate of return on each stock if the market return is equally likely to be 5% or 25% (Hint: ‘equally...
Consider the following expectations for the market and two particular stocks in two possible equally likely...
Consider the following expectations for the market and two particular stocks in two possible equally likely states: (Please show the work step by step) State                          Market Return                                  Stock A                                    Stock B Boom                                 25% 38% 12% Recession 5% -2% 6% A. What is the beta of each stock? Remember that beta can be computed as the covariance of the stock’s return with the market return divided by the variance of the market return. B. What is the expected return on each...
You are creating a portfolio of two stocks. Pear Inc. has expected return of 15% and...
You are creating a portfolio of two stocks. Pear Inc. has expected return of 15% and standard deviation of 30%. InstaCafe Inc. has expected return of 13% and standard deviation of 40%. The two stocks' covariance is -0.036 and the risk free rate is 2%. What percentage of the Optimal Risky Portfolio will be invested in Pear Inc? Provide your answer in percent rounded to two decimals, omitting the % sign.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT