Landon Stevens is evaluating the expected performance of two common stocks, Furh
ID: 2726823 • Letter: L
Question
Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 5.4 percent, the expected return on the market is 12.6 percent, and the betas of the two stocks are 1.6 and .8, respectively. Stevens’s own forecasts of the returns on the two stocks are 16.80 percent for Furhman Labs and 11.40 percent for Garten.
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.)
Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 5.4 percent, the expected return on the market is 12.6 percent, and the betas of the two stocks are 1.6 and .8, respectively. Stevens’s own forecasts of the returns on the two stocks are 16.80 percent for Furhman Labs and 11.40 percent for Garten.
Explanation / Answer
Required return of stock = risk free return + beta * (market return – risk free return)
Required return of Furhman Labs = 5.4 + 1.6*(12.6- 5.4) = 16.92
Required return of Garten Testing = 5.4 + .8*(12.6- 5.4) = 11.16
Furhman Labs = OVERVALUED
Garten Testing = UNDERVALUED
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.