Question

**Under/Over Valued Stock** A manager believes his
firm will earn a 17.4 percent return next year. His firm has a beta
of 1.64, the expected return on the market is 15.4 percent, and the
risk-free rate is 5.4 percent. Compute the return the firm should
earn given its level of risk and determine whether the manager is
saying the firm is under-valued or over-valued.

Answer #1

Based on CAPM, Required Return on a stock = Risk free rate + Beta * (Expected market Return - Risk free rate)

Required Return on a stock = 5.4% + 1.64 * (15.4% - 5.4%) = 5.4% + 16.4% = 21.8%

Required Return > Expected Return on this stock

Based on simple rules of CAPM:

If expected return > Required return - firm is undervalued

If expected return < Required return - firm is overvalued

If expected return = Required return - firm is fairly valued

Hence, for our question, the firm is **OVERVALUED.**

Under/Over Valued Stock A manager believes his firm will earn a
17.3 percent return next year. His firm has a beta of 1.63, the
expected return on the market is 15.3 percent, and the risk-free
rate is 5.3 percent. Compute the return the firm should earn given
its level of risk and determine whether the manager is saying the
firm is under-valued or over-valued.

A manager believes his firm will earn a return of 15.00 percent
next year. His firm has a beta of 1.21, the expected return on the
market is 13.00 percent, and the risk-free rate is 6.00
percent.
Compute the return the firm should earn given its level of risk.
(Round your answer to 2 decimal places.)
Determine whether the manager is saying the firm is undervalued
or overvalued.
undervalued
overvalued
A firm is expected to pay a dividend...

please show work
A.The risk-free rate of interest is 2 percent and the expected
return on the market is 9 percent. Elysian Incorporated has a beta
of 1.3, is expected to pay an annual dividend of $0.80 next year
while experiencing a 10 percent growth rate, and is selling in the
market for $20 per share. What is the stock’s equilibrium required
rate of return? 11.1%
B. Determine whether Elysian is under, over, or correctly
valued, and illustrate with a...

A stock is currently valued at 100, and next year it will have
a value of 150 with probability 0.5 or a value of 70 with
probability 0.5. The risk-free interest rate is 5%, and the average
return on the market index is 10%. What do you expect the beta of
the stock is?
In the example above, what are the risk neutral
probabilities?
Use the risk neutral probabilities to value a call option with
exercise price 100, which matures...

A stock has expected return of 12.0 percent, the risk free rate
is 3.00 percent, and the market risk premium 4.00.
What must be the stock beta?
What is the equity risk premium for the stock?
What is the return on market portfolio?
Draw the Security Market line: show the risk free rate, return
on the stock and return on the market portfolio

A stock has an expected return of 17.5 percent. The
beta of the stock is 2.83 and the
risk-free rate is 2.9 percent. What is the market
risk premium?

A stock has an expected return of 12.4 percent and a beta of
1.37. The market expected return is 10 percent. What must the
risk-free rate be?
Fill in the values in the spreadsheet.
Input area:
Stock E(R)
12.40%
Stock beta
1.32
Market E(R)
10.00%
Output area:
Risk-free

The market expects a stock to return 14.54% over then next year.
The stock's beta is 0.84. If the risk-free is 1.87% and the market
risk premium is 5.22%, what is the stock's alpha?
Your father asked for your help. He has been offered an annuity
that will pay him $1,566 per month for 23 years. He thinks that the
fair return should be 4.37%. What is the most he should be willing
to pay for it today? Enter only...

the common stock of flavorful teas has expected return of
26.87 percent the return on the market is 17 percent and the risk
free of return is 2.9% what is the beta of this stock

from the following information, determine whether or not stock A
is over- or under -valued. why?
Stock A
Stock B
Stock C
Stock D
Stock E
Beta
0.70
1.00
1.15
1.40
-3.30
Actual Return
8%
6.20%
15.15%
5.15%
6%
Referring to the previous question, how will stock
A move toward the equilibrium price?

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 27 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 4 hours ago

asked 4 hours ago

asked 4 hours ago

asked 4 hours ago

asked 4 hours ago