Question

You are trying to decide whether to purchase stock or not. The stock is currently sold...

You are trying to decide whether to purchase stock or not. The stock is currently sold for $43.54 and is expected to be $46.50 in a year. A dividend of $1.50 per share will be distributed during the year. The stock has a beta of 1.25. The risk-free rate is 3%, and the expected return on the market is 10%. Based on the information, should you buy the stock?

Homework Answers

Answer #1

CAPM Return =

= 3% + 1.25 ( 10% - 3%)

= 11.75%

Expected Return =

=

= 10.24%

When CAPM OR required Rate of Return is more than the Expected Return of the stock, the Stock is overvalued.

Overvalued securities are not a buy option. They are sold. No, we should not buy the stock.

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