Estimate the expected returns using the capm calculate the, Financial Management

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Estimate the expected returns using the capm calculate the

You are given the following information about Wendy's International and Sbarro (pizza and restaurants).

Stock Current Expected Expected Estimated

Price Price Dividends Beta

Wendy's $28.875 $32.625 $1.25 1.05

Sbarro $51.25 $55.875 $0.60 1.25

ERM = .14 RF = .07

a) Estimate the expected returns using the CAPM.

b) Calculate the predicted returns for each stock.

c) Determine which stock is overvalued or/and undervalued. Explain.

d) Explain where the predicted returns would plot (above or below) the SML. Explain.

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