Use the following information to answer questions 1- 2XQV’s stock is trading at $40. Earnings per share are expected at E1 = $5.00; all will be paid out as dividends. Valuing the stock as a perpetuity P0 =E1 / r, the expected return is 12.5%. The risk-free rate is 6%; the market risk premium is 8%. XQV’s beta is 0.875. The stock is …………………………………………………..Group of answer choicesa. overpricedb. fairly pricedc. underpriced 2. Its alpha is ………..……………………… %.

Answered: a. overpriced

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Use the following information to answer questions 1- 2

XQV’s stock is trading at $40. Earnings per share are expected at E₁ = $5.00; all will be paid out as dividends. Valuing the stock as a perpetuity P₀ =E₁ / r, the expected return is 12.5%. The risk-free rate is 6%; the market risk premium is 8%. XQV’s beta is 0.875.

The stock is …………………………………………………..

Group of answer choices

a. overpriced

b. fairly priced

c. underpriced

2. Its alpha is ………..……………………… %.

Expert Solution

Step 1

Return as per Capital-asset pricing model (CAPM) = Risk-free rate + Beta * Market risk premium

= 6% + 0.875 * 8%

= 13.00%

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