1. An investor expects that a stock purchased for $60 will be sold for $70, at which time a dividend of $1 will be paid. Over this same time period, the stock has a beta of 1.2, the market has an expected return of 16%, and the risk-free rate is 6%. What is the best assessment of the stock's valuation?
a. The stock is fairly valued because the required return equals the expected return.
b. The stock is overvalued because the required return is greater than the expected return.
c. The stock is undervalued because the required return is less than the expected return.
2. An investor is holding 100 shares of a stock which are currently priced at $52 per share. The stock undergoes a 5-for-3 stock split. After the stock split the price of the new stock is closest to:
a. $31.20
b. $52.00
c. $86.67