HomeworkLib
Question

A manager believes his firm will earn a 17.5 percent return next year. His firm has...

A manager believes his firm will earn a 17.5 percent return next year. His firm has a beta of 1.65, the expected return on the market is 15.5 percent, and the risk-free rate is 5.5 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.

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Required Rate of Return =Risk Free Rate+Beta*(Market Return-Risk Free Rate) =5.5%+1.65*(15.5%-5.5%) =22.00%

Since the expected return is less than required rate hence the firm is overvalued.

0 0
Add a comment
Know the answer?
Add Answer to:
A manager believes his firm will earn a 17.5 percent return next year. His firm has...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • VITnOT CT 3mTA 10-10 Company Risk Premium Paycheck, Inc., has a beta of 0.94. If the mar- ket return is expected t...

    VITnOT CT 3mTA 10-10 Company Risk Premium Paycheck, Inc., has a beta of 0.94. If the mar- ket return is expected to be 11 percent and the risk-free rate is 3 percent, what is Paycheck's risk premium? (LG10-3) 10-11 Portfolio Beta You have a nortfolio with a beta of 1.35. What will be the 10-20 Undervalued/Overvalued Stock A manager believes his firm will earn a 14 percent return next year. His firm has a beta of 1.2, the expected return...

  • SHOW THE FORMULAS ? X Undervalued/Overvalued Stock - Excel FORMULAS DATA REVIEW - Sign In PAGE...

    SHOW THE FORMULAS ? X Undervalued/Overvalued Stock - Excel FORMULAS DATA REVIEW - Sign In PAGE LAYOUT VIEW OSSA FILE HOME INSERT Calibri Paste B I U- Clipboard Font E2 - 11 - A A -A Alignment Number Cells Editing Conditional Format as Cell Formatting Table - Styles Styles A B A manager believes his firm will earn a 16.50 percent return next year. His firm has a beta of .64, the expected return on the market is 14.40 percent,...

  • 1. Calculate the risk appropriate level of return 2. Determine whether the stock is undervalued or...

    1. Calculate the risk appropriate level of return 2. Determine whether the stock is undervalued or overvalued. Undervalued/Overvalued Stock - Excel Sign In FILE НОМЕ PAGE LAYOUT FORMULAS REVIEW INSERT DATA VIEW 11 Calibri A A Cell Cells Editing в IU- Paste A Alignment Number Conditional Format Formatting as Table Styles Clipboard Styles Font A1 fox В E G A manager believes his firm will earn a 16.50 percent return next year. His firm has a beta of 64, the...

  • a mutual fund manager expects her portfolio to earn a rate of return of 11 percent...

    a mutual fund manager expects her portfolio to earn a rate of return of 11 percent this year. The beta of her portfolio is .8. If the rate of return available on risk-free assets is 4% and you expect the rate of return on the market portfolio to be 14%, should you invest in this mutual fund?

  • A mutual fund manager expects her portfolio to earn a rate of return of 11% this...

    A mutual fund manager expects her portfolio to earn a rate of return of 11% this year. The beta of her portfolio is 0.6. The rate of return available on risk-free assets is 4% and you expect the rate of return on the market portfolio to be 14%. What expected rate of return would you demand before you would be willing to invest in this mutual fund? (Do not round intermediate calculations. Enter your answer as a whole percent.)

  • A mutual fund manager expects her portfolio to earn a rate of return of 11% this...

    A mutual fund manager expects her portfolio to earn a rate of return of 11% this year. The beta of her portfolio is 0.9. The rate of return available on risk-free assets is 4% and you expect the rate of return on the market portfolio to be 14%. What expected rate of return would you demand before you would be willing to invest in this mutual fund? Expected Rate of Return: %

  • Over the past year you held a stock that generated a return of 15 percent. The...

    Over the past year you held a stock that generated a return of 15 percent. The stock's beta was 1.5, the risk-free rate was 3 percent and the market risk premium was 7 percent. a. Based on the capital asset pricing model (CAPM) what is the return that you should have expected to earn on this stock? (5 pts)

  • An analyst believes that inflation is going to increase by 3.0% over the next year, while...

    An analyst believes that inflation is going to increase by 3.0% over the next year, while the man be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plo Calculate Happy Corp.'s new required return. Then, on the graph, use the green points (rectang the new SML suggested by this analyst's prediction. Happy Corp.'s new required rate of return is Tool tip: Mouse over the points on the graph to see their coordinates. REQUIRED RATE OF...

  • Your analysis indicates that the stock of Dewey Cheatham and Howe Industries will return 10% next...

    Your analysis indicates that the stock of Dewey Cheatham and Howe Industries will return 10% next year. The stock has a beta of 1.5, the risk free rate is 4% and the expected market risk premium is 5%. Is the stock over-valued, undervalued, or fairly valued? Explain.

  • A stock has an expected return of 11 percent, its beta is 0.6, and the risk-free...

    A stock has an expected return of 11 percent, its beta is 0.6, and the risk-free rate is 5.5 percent. What must the expected return on the market be? 15.40% 13.93% 14.67% 15.25% 9.17%

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT