Under/Over Valued Stock
A manager believes his firm will earn a 10.75 percent return next year. His firm has a beta of 1.35, the expected return on the market is 8.5 percent, and the risk-free rate is 3.5 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. 14.975%, over-valued
B. 10.25%, under-valued
C. 14.975%, under-valued
D. 10.25%, over-valued