Landon Stevens is evaluating the expected performance of two common stocks, Furh

Question

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 4.4 percent, the expected return on the market is 10.6 percent, and the betas of the two stocks are 1.4 and .7, respectively. Stevens’s own forecasts of the returns on the two stocks are 10.60 percent for Furhman Labs and 10.50 percent for Garten.

1.  
Calculate the required return for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Stock   Required Return
Furhman Labs   %
Garten Testing   %

2.   Is each stock undervalued, fairly valued, or overvalued?
      
    Furhman Labs
      
   
   Undervalued
   Overvalued
   Fair valued
      
    Garten Testing
      
   
   Fair valued
   Overvalued
   Undervalued

Explanation / Answer

Furham Garden ke = Rf +Beta(Rm-Rf) Beta                                   1.40                                          0.70 Return on market 10.60% 10.60% Risk Free Rate 4.40% 4.40% ke   4.4% + 1.4(10.6-4.4) 4.4% + .7(10.6-4.4) ke   4.4% + 1.4(6.2%) 4.4% + .7(6.2%) ke   4.4% + 8.68% 4.4% + 4.34% ke   13.08% 8.74% Own Forecast 10.60% 10.50% Overvalued Undervalued Since own forecast is less than Required return Since own forecast is greater than Required return

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