Landon Stevens is evaluating the expected performance of two common stocks, Furh
ID: 2737426 • 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 4.8 percent, the expected return on the market is 11.4 percent, and the betas of the two stocks are 1.8 and .8, respectively. Stevens’s own forecasts of the returns on the two stocks are 15.60 percent for Furhman Labs and 11.20 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 4.8 percent, the expected return on the market is 11.4 percent, and the betas of the two stocks are 1.8 and .8, respectively. Stevens’s own forecasts of the returns on the two stocks are 15.60 percent for Furhman Labs and 11.20 percent for Garten.
Explanation / Answer
Ans: CAPM for Furhman Labs= Rf+B(Rm-Rf) 4.8+1.8(11.4-4.8) 16.68% CAPM for Garten Testing Inc= 4.8+0.8(11.4-4.8) 10.08% Ans2 Particular Req Ret. Given ret Farhman Lbs 16.68 15.6 Undervalued Testing Inc 10.08 11.2 Over valued
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