A manager believes his firm will earn a 16.00 percent return next year. His firm

Question

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.

Compute the return the firm should earn given its level of risk. (Round your answer to 2 decimal places.)

Determine whether the manager is saying the firm is undervalued or overvalued.

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.

Explanation / Answer

required return = 6% + 1.23 * (14%-6%) = 15.84%

overvalued

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