You expect XYZ Company stock to pay a $2 dividend next year. In addition, you expect the price of the stock to be $106 next year. You estimate that the Beta of XYZ is 1.5. The risk-free rate is 4%, and the expected return on the market portfolio is 7%.
a. The current price of the stock is $96. Calculate the intrinsic value of the stock and explain whether stock XYZ is underpriced or overpriced.
b. Would you buy or short sell XYZ stock at the current price of $96?