Problem:
A manager believes his firm will earn a 16.00 percent return next year. His firm has a beta of 1.23, the expected return on the market is 14.00 percent, and the risk-free rate is 6.00 percent.
Requirement:
Question 1: Compute the return the firm should earn given its level of risk.
Question 2: Determine whether the manager is saying the firm is undervalued or overvalued.
Note: Provide support for your rationale.