Suppose we estimate SBUX to have β=0.80 when the market premium is 9% and the risk free rate is 3%. However, if SBUX is currently priced to return 9%, then according to the CAPM model SBUX stock is currently _______________ . A) overvalued B) undervalued C) priced just right!

Suppose we estimate SBUX to have β=0.80 when the market premium is 9% and the risk free rate is 3%. However, if SBUX is currently priced to return 9%, then according to the CAPM model SBUX stock is currently _______________ . A) overvalued B) undervalued C) priced just right!

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 7P

See similar textbooks

Related questions

Q: stock currently sells for RM123. It's expected earnings per share are RM5.12. The average P/E ratio…

A: P/E ratio is very important for comparison across the industry and it tells that stock will rise or…

Q: Your clothing business, FashionV Co has fixed costs of $1,000 per year, depreciation charges of $500…

A: The degree of operating leverage is used to find out the impact of change in sales on the earnings…

Q: A firm depreciated its assets with regard to an investment to $0.00 book value by the end of the…

A: Here, Scrap Market Value = $1,200,000 Life of the project = 15 years Interest rate = 14% Tax rate =…

Q: The Alavis have decided to invest in a their Son. college fund for They invested $50,000 deferred…

Q: invest?

A: Investment refers to the process of acquiring an asset for building wealth and for saving the…

Q: Intro A project requires an initial investment of $77.4 million to buy new equipment, and will…

A: The IRR method is used to measure the profitability of a project. It uses the NPV formula but…

Q: 1.4 Calculate the earnings of G. Henry using the straight piecework incentive scheme from the…

A: G produces a product in 5 minutes. So production per hour = 60 minutes / 5 = 12 products So Normal…

Q: Corso Inc. wants to raise $10 million by issuing 15-year zero coupon bonds with a face value of…

A: Amount to raise is $10 million Time period is 15 years Type of bond is zero coupon bond par value is…

Q: You are loaned $300 at the end of years 1 and 2, and loaned X at the end of year 3. You pay this…

A: We will use the concept of time value of money. Here each payment is made in a different time period…

Q: If interest charge for leasing is 8%, which is more favorable for the businessman, borrow and buy or…

A: Time value of money (TVM) refers to the method or technique which is used to measure the amount of…

Q: Michelle is 25 years old and has decided to start a retirement program. Beginning in exactly one…

A: Time period is 30 years Annual savings are $15,000 Interest rate is 4% To Find: Amount saved for…

Q: QUESTION) Calculate the Accounting Rate of Return (on average investment) of Project B (expressed to…

A: Accounting rate of return is a ratio in capital budgeting that does not take into account the time…

Q: (a) How much does she need for the down payment? How much money does Maria need to borrow? (b) What…

A: Loan (mortgage) amortization schedule refers to a schedule which is prepared to shows the periodic…

Q: .What was size of the investment in the fund if it was earning 5.50% compounded semi-annually?

A: Present Value of Perpetuity Due: It refers to the present worth of the annuity payments made for…

Q: Hotel California, a lovely place along the 101 Highway, last underwent an upgrade in 1969. As a…

A: Expected Profit The expected profit (read, average profit in this case) can be computed as the sum…

Q: Finance In a bubble, the buying is due to investors believing the price of the asset will continue…

A: In finance bubble refers to that situation in which there is a rapid increase in the market prices…

Q: 4. A principal of P27,000 was placed in an investment which gives the interest of 12% compounded…

A: Solution:- When an amount is invested somewhere, it earns interest on it. The amount initially…

Q: calculates that a project with conventional cash flows and a required return of 14% has a negative…

A: Internal rate of return when net present value is zero that means present value of cash flow is…

Q: What exactly is a programme? What is a portfolio of projects? Examine the link between project,…

A: Portfolio is referred as the collection of the financial investments such as - bonds, commodities,…

Q: You live in the United States and want to try to make some money through interest rate arbitrage…

A: Foreign Exchange Market is that under which we were trading in Foreign Currency we can make the…

Q: A$1000,5%bondwithannualcouponswillberedeemedattheendof9years.Findthepricetoyield6%. a. $1,074.35 b.…

A: To calculate the bond price we will use the below formula Bond price =…

Q: What is the function of Deposit Insurance Corporation? Select one: It does not give guarantee…

A: Deposit insurance corporation is for safety of deposits and for the safety of banks and financial…

Q: Zeda Enterprises has the option to invest in machinery in projects A and B but finance is only…

A: Here, Details of project A: Year Initial Investment Net Profit Depreciation 0 $…

Q: You have 100/300/50 in insurance coverage. You just got into an accident with a car carrying 15…

A: 100/300/50 is a type of automobile liability insurance cover which covers below 3 aspects:…

Q: What is the amount that a company can borrow today if its ann capacity is 10,000 KD, the loan…

A: Loans are paid by annual payments and these carry the payment for loan and pay for interest amount…

Q: Fujita, Incorporated, has no debt outstanding and a total market value of $332,100. Earnings before…

A: Earning Per Share: It indicates company's profitability. It is calculated by dividing company's net…

Q: A $3,000,000,000 bond with coupon j2 = 15% maturing in 12 years can be redeemed after 4 years at 108…

A: The price of a bond: The maximum price that can be paid to get a minimum return is the total present…

Q: 18. Karen wants to borrow $5,000 and she is a bit desperate. She says “I’ll pay you $500/year at…

A: Present Value of Ordinary Annuity refers to the concept which gives out the discounted or today's…

Q: In calculating the incremental after-tax cash flows associated with a particular investment, the…

A: Sunk Costs is that cost which was already incurred on the project before starting the Project these…

Q: 1) What monthly nominal rate of return must his investment earn for him to achieve his goal? 2) If…

A: Time value of money (TVM) refers to the method or technique which is used to measure the amount of…

Q: You go to the loan fund of the company where you work and find that they have an emergency fund…

A: Given, that the payments in month 3,6,9,12 is double than the normal payments in other months.…

Q: down because the risk premium will rise

A: Stock price refers to the current price at which stock trades in the market. If there is a…

Q: 38 Which of the following is NOT the agency under Ministry of Finance (MOF)? Select one: Inland…

A: Federal agencies under the Ministry of Finance (MOF), Malaysia include Inland Revenue Board of…

Q: What are Capital Markets, and how do bonds markets fit into the definition of Capital Markets?

A: Capital markets is a broad term used to describe a venue where funds are exchanged between suppliers…

Q: The two most commonly known measures of performance measurement for managers are: a. The Sharpe and…

A: The managers of portfolio are rewarded based on the performance of portfolio and they are based on…

Q: erpetuity is a type of annuity which has infinite period of payments. The present value of a…

A: Present Value: It represents the present worth of future cash flows. Thus, it is calculated by…

Q: 32 Which of the following is NOT regulated by Securities Commission (SC)? Select one: Bond…

A: The securities commission will be the regulating commission of equity market and bond market in the…

Q: A company borrowed at 7 42% compounded monthly to purchase equipment, agreeing to make payments of…

A: Given, The rate of interest is 7.42% compounded monthly. Quarterly payments is $2900 Term is 17…

Q: Describe the many different factors that need to be taken into account when deciding how to fund a…

A: Financing is the process of providing funds for the commercial activities, purchases, or the…

Q: interest rate and currency swap dealer

A: Risk confronting refers to some uncertainty or potential loss chances that will go to happen in…

Q: How would I calculate the nominal interest rate that is used in the effective annual rate equation…

A: Total number of periods = 12 Loan payment is 15000 Monthly payment is 1387.5 To Find: Nominal…

Q: What is EVA •107,500 • 127,500 • 60,0000 • 105,000

A: EVA is the economic value added that how much company is earning above the cost of capital of the…

Q: 4. Find the compound amount and interest on P360,000 for 8 years and 6 months at 10% compounded…

A: Under Compounded Interest Interest is on Principal + Interest amount both while in simple interest…

Q: The value of an investment can be defined in numerous ways. Which is FALSE? a. It is the value…

A: There are many different types valuation method of the investment some depends on the cash flow or…

Q: Camden Limited is company which specializes in the manufacture of large scale replacement parts for…

A: Data given: Initial investment = R 40 million Net cash flow= R 16 million n= 4 years Depreciation…

Q: howmuch would be the investor’s cash dividend? a. PhP 16,000 b. PhP 12,500 c. PhP 16,500 d. PhP…

A: Cash Dividend: It refers to the distribution of money or funds paid to the shareholders usually as…

Q: What amount of money invested today at 15% interest can provide the following scholarships: P 30 000…

A: The present value is the discounted value of future cash flows. For sustaining a scholarship the…

Q: a. Year 0 cash flow Year 1 cash flow Year 2 cash flow Year 3 cash flow b. NPV

A: Net present value refers to the balance of the present value of cash flows compared with the…

Q: Printgo Suppliers had an inventory of 10 printers at R2 000 each on 01 March 2022. The following…

A: The Weighted average cost method assigns a cost to inventory items based on the total cost of goods…

Q: Question 2 A race car driver wishes to insure his car for the racing season for $50,000/=. The…

A: The following information has been provided in the question: Insurance amount =$50,000 Probability…

Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

A) overvalued

B) undervalued

C) priced just right!

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

(d) Suppose the risk-free rate is 4%, the market risk premium is 15% and the betas for stocks X and Y are 1.2 and 0.2 respectively. Using the CAPM model, estimate the required rates of return of Stock X and Stock Y. (e) Given the results above, are Stocks X and Y overpriced or underpriced? Explain.
(d) Suppose the risk-free rate is 4%, the market risk premium is 15% and the betas for stocks X and Y are 1.2 and 0.2 respectively. Using the CAPM model, estimate the required rates ofreturn of Stock X and Stock Y. (e) Given the results above, are Stocks X and Y overpriced or underpriced? Explain.
APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?
Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found to be halfof the required return (RB) on stock B. The risk-free rate (Rf) is one-fourthof the required return on A. Return on market portfolio is denoted by RM. Find the ratioof betaof A(A) tobeta of B(B). Thank you for your help.
Suppose the CAPM is true. Consider two assets, X and Y, and the market M. Suppose cov(X,M) = .3, cov(Y,M) = .5. %3D (a) Is the expected return higher on X or Y? (b) Suppose var(M) = 1.5, what are the betas of X and Y? (c) Suppose the expected market return is 20% and the risk free rate is 5%, what is the expected returns of X and Y?. (d) Given your analysis in (a)-(c), what type of investor would prefer asset X to asset Y?
According to CAPM, the expected rate of return of a portfolio with a beta of 1.0 and an alpha of 0 is:a. Between rM and rf .b. The risk-free rate, rf .c. β(rM − rf).d. The expected return on the market, rM.
Consider an event study of the following stock. Realised return Market return t = 0 (event day) 0.1 0.1 t =1 0.06 0.04 t = 2 0.03 0.02 t = 3 0.015 0.01 Suppose that the estimated market model is . What is the CAR (cumulative abnormal returns) for t = 3?
Consider a single-index model economy. The index portfolio M has E(RM ) = 6%, σM = 18%.An individual asset i has an estimate of βi = 1.1 and σ2ei = 0.0225 using the single index modelRi = αi + βiRM + ei. The forecast of asset i’s return is E(ri) = 12%. rf = 4%. a) According to asset i’s return forecast, calculate αi. (b) Calculate the optimal weight of combining asset i and the index portfolio M . (c) Calculate the Sharpe ratio of the index portfolio M and the portfolio optimally combiningasset i and the index portfolio M .
Suppose risk-free rate of return = 2%, market return = 7%, and Stock B’s return = 11%. a. Calculate Stock B’s beta. b. If Stock B’s beta were 0.80, what would be its new rate of return?
Assume the APT equation for portfolios A and B with the following system of equations: E[rA] = λ0 + (λ1)3 + (λ2)0.2 = 11.0 E[rB] = λ0 + (λ1)2 + (λ2)1 = 13.0 Assume the following: . The risk free rate is λ0 = Rf = 5 . The expected return on the market portfolio is RM = 10 . Expected returns are consistent with the CAPM. . (hint: note that λ1 = E[RA] − Rf and λ2 = E[RB] − Rf ). Answer the following: (a) What are λ1 and λ2? (b) What is the CAPM β associated with the pure portfolio associated with factor 1? (c) What is the CAPM β associated with the pure portfolio associated with factor 2?
Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (bA) to beta of B (bB). please show all workings and not merely : Ra = 1/2 rbRf = 1/4 Ra
Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is foundto be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the requiredreturn on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B(B). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to payreturns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standarddeviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also hasstandard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whetherasset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i (??) = ???????, where ??,?? are standard deviations of asset i and marketportfolio, ??? is the correlation between asset i and the market portfolio)