1. Under/Over Valued Stock A manager believes his firm will earn a 12.55 percent return next year. His firm has a beta of 1.47, the expected return on the market is 9.7 percent, and the risk-free rate is 4.7 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.
12.05%, under-valued
18.959%, over-valued
18.959%, under-valued
12.05%, over-valued
2. 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.
21.6%, over-valued
25.939%, under-valued
25.939%, over-valued
21.6%, under-valued