Stock Y has a beta of 1.50 and an expected return of 14.2 percent. Stock Z has a beta of .85 and an expected return of 10.7 percent. If the risk-free rate is 4.60 percent and the market risk premium is 7.10 percent, are these stocks overvalued or undervalued?

Stock Y has a beta of 1.50 and an expected return of 14.2 percent. Stock Z has a beta of .85 and an expected return of 10.7 percent. If the risk-free rate is 4.60 percent and the market risk premium is 7.10 percent, are these stocks overvalued or undervalued?

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 12P: Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate of return on an average...

See similar textbooks

Related questions

Q: Tanaka Machine Shop is considering a four-year project to improve its production efficiency. Buying…

A: Net present value:The net present value (NPV) of the project represents the difference between the…

Q: The four people below have the following investments. Invested Amount Interest Rate Compounding…

A: Future value- A dollar invested today in a financial instrument grows throughout investment as per…

Q: Duo Corporation is evaluating a project with the following cash flows: Year Cash Flow 0 -$ 16,300 1…

A: MIRR- This is a modification of IRR and it is based on the assumption that positive cash flows are…

Q: Sonali and Nilesh are married. On December 30th of last year, Sonali contributed $25,000 to a…

A: The objective of the question is to determine the correct tax implications for Sonali and Nilesh…

Q: 6. R.S. Green has 250,000 shares of common stock outstanding at a market price of $28 a share. Next…

A: Number of Equity = ne = 250,000Current Price of Equity = pe = $28Expected Dividend = d1 =…

Q: You manage a pension fund that will provide retired workers with lifetime annuities. You determine…

A: Duration of bond is the weighted required to receive all cash flows from the bond and it shows the…

Q: Suppose you are given the following information about four different, default-free bonds, each with…

A: The 4-year spot rate is 12.519%. Explanation:To calculate the 4-year spot rate, we can use the…

Q: a. Calculate the equity value of your margin account on each settlement date, including any…

A: The future contract is similar to a promise to purchase or sell an item at a specific price at a…

Q: 7. Consider the following information about Stocks I and II: Probability of Rate of Return if State…

A: Given Data: State of EconomyProbabilityReturn on Stock 1Return on Stock 2Recession…

Q: A Company borrowed money from a local bank. The note the company signed requires five annual…

A: The PV function in Excel computes the present value of an annuity, needing the interest rate, number…

Q: You expect that Adidas AG will pay an annual dividend of $1.36 one year from now. You expect this…

A: Dividend For Year 1 = d1 = $1.36Growth Rate for next 5 Years = g5 = 11.5%Growth Rate after year 5 =…

Q: None

A: A mortgage is a financial arrangement or loan that is typically used to purchase real estate, such…

Q: Required information [The following information applies to the questions displayed below.] Project Y…

A: Income = $126,080Initial investment = $306,000Life of project = 5 yearsTo find: Project's accounting…

Q: The following table shows annual rates for various types of loans in 2021. Assume monthly payments…

A: A mortgage is a loan borrowed for property purchase which is covered by the property itself. It is…

Q: Given Principal $10,000, Interest Rate 8%, Time 240 days (use ordinary interest) Partial payments:…

A: Interest is the amount charged by bank in consideration of advancing loan to its borrowers. It is…

Q: State of Economy Boom Bust Probability of State of Economy .71 .29 Stock A .09 .18 Stock B .03 Rate…

A: Rate of returns if state occursState of economyProbability of state of the economyStock AStock…

Q: COSTS & FEATURES OF A CHECKING ACCOUNT Read each situation below, then circle the choice that you…

A: The objective of this question is to identify the most cost-effective banking solution for each…

Q: Please show the appropriate formula and calculations for the following:…

A: Project Evaluation for Rare Agri-Products Ltd.1. Discount Rate CalculationWe cannot definitively…

Q: Consider the following scenario analysis: Scenario Recession Normal economy Boom Rate of Return…

A: Treasury Bonds: Treasury bonds, issued by the U.S. Department of the Treasury, are long-term debt…

Q: McKnight Company is considering two different, mutually exclusive capital expenditure proposals.…

A: The "net present value" refers to a capital budgeting technique that estimates the difference…

Q: ZYX Company has two different bonds currently outstanding. Bond X has a face value of $200 000 and…

A: The objective of the question is to calculate the price of two bonds, Bond X and Bond Y, and to…

Q: Suppose your firm is considering investing in a project with the cash flows shown below, that the…

A: MIRR is the modified form of IRR in which it is assumed that reinvestment is different from cost of…

Q: sts of $58,792 invested in a stock that has a beta = 1.7, $71,686 invested in a stock that has a…

A: Risk-free rate4.7%Last year's portfolio required return7.4%Current year's market risk premium rises…

Q: Monroe Corporation is considering the purchase of new equipment. The equipment will cost $38,000…

A: The present value of the annuity can be computed by multiplying the PVIFA annuity factor for a given…

Q: (Compound interest) To what amount will the following investments accumulate? a. $5,000…

A: (a) Amount accumulated in 10 years = $12,968.71(b) Amount accumulated in 7 years = $13,710.59(c)…

Q: None

A: The net present value(NPV) of the project is calculated using following equationWhere, CF0 is the…

Q: a-1. Compute the IRR for both projects. Note: Do not round intermediate calculations and enter your…

A: Capital budgeting is similar to making significant long-term financial decisions. It involves…

Q: The loan will have a term of 54 months and monthly payments of $385.13. The interest rate on the…

A: Data givenMonthly payment = $385.13Number of monthly payments = 54Interest rate = 8.84% compounded…

Q: The following table shows the projected free cash flows of an acquisition target. The potential…

A: Maximum acquisition price:The maximum acquisition price refers to the highest amount a potential…

Q: Suppose that Cleveland Co. engages in international business, with transactions denominated in four…

A: We need to calculate the net inflow or outflow for each currency and then convert these amounts into…

Q: 4. XYZ Corporation expects to pay dividend of $1.00 next year. The corporation forecasts that the…

A: Stock price can be defined as the sum of all future dividends discounted back to the present using…

Q: Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its…

A: Net present value:Net Present Value (NPV) serves as a vital financial metric used to evaluate the…

Q: d. Calculate the net present value. (Enter the answers in whole dollars, not in millions. Round "PV…

A: In capital budgeting decisions important role because it helps financial decisions by conceiving…

Q: Assume Highline Company has just paid an annual dividend of $1.06. Analysts are predicting an 11.3%…

A: Current Dividend = d0 = $1.06Growth Rate for next 5 Years = g5 = 11.3%Growth Rate after year 5 = g =…

Q: $500 0 F = ? $500 1 2 3 4 5 i = 10%

A: Future value is the value of the single or a series of cash flows after n number of years. It is the…

Q: am. 123.

A: The objective of the question is to determine the yield to maturity of the Vail Inc. bonds, the…

Q: Taussig Corp.'s bonds currently sell for $910. They have a 6.35% annual coupon rate and a 20-year…

A: Face value = $1,000Coupon rate = 6.35%Years to maturity = 20 yearsCurrent price = $910Call price =…

Q: A firm is considering an investment in a new machine with a price of $18.03 million to replace its…

A: Capital budgeting is a method that helps investors, determine the efficiency and profitability of…

Q: The following table shows annual rates for various types of loans in 2021. Assume monthly payments…

A: When the lender lends a loan to the borrower, he charges a rate of interest on the borrowed amount.…

Q: Consider the following information about three stocks: State of Economy Probability of State of…

A: Weights:Stock A: 40%Stock B: 40%Stock C: 20%

Q: Which formula property calculates the future value of monthly deposits of $800 lent deposit for 10…

A: Future value shows the value of the investment after a certain period at a specified rate. The…

Q: 9. A portfolio is composed of two stocks, Stock A and B. The standard deviation of return for Stock…

A: The correlation between two random variables will always lie between -1 and 1, and is a measure of…

Q: Winnebagel Corp. currently sells 29, 300 motor homes per year at $79,500 each and 8, 300 luxury…

A: Sales revenue refers to the amount received by the company from selling goods and services to the…

Q: A $42,000 mortgage taken out on June 1 is to be repaid by monthly payments rounded up to the nearest…

A: Monthly payment refers to an amount that is paid every month for the repayment of a loan amount…

Q: Rangel Corporation issued $520,000 of 5%, 15-year bonds payable on March 31, 2022. The market…

A: Price of the bond is equal to the present value of the future coupons and the maturity payment.Price…

Q: Beth and Bob Martin have total take - home pay of $5, 000 a month. Their monthly expenses total $4,…

A: The emergency fund is quite necessary and one has to make provision for that based on monthly home…

Q: Cullumber Corp. is considering purchasing one of two new diagnostic machines. Either machine would…

A: NPV ( Net Present Value) is a method that is used to assess an investment's profitability by…

Q: Oxford Company has limited funds available for investment and must ration the funds among four…

A: Net Present Value (NPV): NPV is a financial metric used to assess the profitability of an investment…

Q: Innovation Company is thinking about marketing a new software product. Upfront costs to market and…

Q: Balance Date before Transaction Annual Interest Rate Number Interest Accrued of Days Charged…

A: Repayment schedule:A repayment schedule outlines the structured plan for repaying a loan over a…

Question

Stock Y has a beta of 1.50 and an
expected return of 14.2 percent.
Stock Z has a beta of .85 and an
expected return of 10.7 percent. If
the risk-free rate is 4.60 percent
and the market risk premium is 7.10
percent, are these stocks
overvalued or undervalued?

Expert Solution

This question has been solved!

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

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction to the concept of CAPM and required vs expected return

VIEW

Step 2: Finding the required return for stock Y and Z

VIEW

Step 3: Making the decision

VIEW

Solution

VIEW

Step by step

Solved in 4 steps with 1 images

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

You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. What are the betas of Stocks X and Y? What are the required rates of return on Stocks X and Y? What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?
1) The risk-free rate is 3.7 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.1 and an expected return of 13.1 percent. Is this stock correctly priced? (underpriced or overpriced?)
Stock Y has a beta of 1.8 and an expected return of 18.2 percent. Stock Z has a beta of 8 and an expected return of 9.6 percent. If the risk-free rate is 5.2 percent and the market risk premium is 6.7 percent, the reward-to-risk ratios for Stocks Y and Z are percent, respectively. Since and the SML reward-to-risk is percent, Stock Y is and Stock Z is (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Stock X has a beta of 1.15 and an expected return of 11.1 percent. Stock Y has a beta of 1.2 and an expected return of 11.5 percent. What is the risk - free rate of return assuming that both stock X and stock Y are correctly priced?
Stock Y has a beta of 0.9 and an expected return of 11.4 percent. Stock Z has a beta of 1.5 and an expected return of 8.06 percent. If the risk-free rate is 2.5 percent and the market risk premium is 7.2 percent, are these stocks correctly priced?
Stock Y has a beta of 1.30 and an expected return of 13.0%. Stock Z has a beta of .75 and an expected return of 10.5%. If the risk-free rate is 4.50% and the market risk premium is 7.00%, are these stocks overvalued (over-priced) or undervalued (under-priced)? (don't confuse price with Return) Stock Y Stock Z
Stock Y has a beta of 1.4 and an expected return of 15.1 percent. Stock Z has a beta of .7 and an expected return of 8.6 percent. If the risk-free rate is 5 percent and the market risk premium is 6.5 percent, the reward-to-risk ratios for Stocks Y and Z are the SML reward-to-risk is percent, Stock Y is and percent, respectively. Since and Stock Z is (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
(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.
Suppose the market risk premium is 9 % and also that the standard deviation of returns on the market portfolio is 0.26 . Further assume that the correlation between the returns on ABX (Barrick Gold) stock and returns on the market portfolio is 0.62 , while the standard deviation of returns on ABX stock is 0.36 . Finally assume that the risk-free rate is 2 %. Under the CAPM, what is the expected return on ABX stock? (write this number as a decimal and not as a percentage, e.g. 0.11 not 11%. Round your answer to three decimal places. For example 1.23450 or 1.23463 will be rounded to 1.235 while 1.23448 will be rounded to 1.234)
1. Stock Y has a beta of 1.2 and an expected return of 11.1 percent. Stock Z has a beta of .8 and an expected return of 7.85 percent. If the risk-free rate is 2.4 percent and the market risk premium is 7.2 percent, the reward-to-risk ratios for stocks Y and Z are ____ and ____ percent, respectively. Since the SML reward-to-risk is ____ percent, Stock Y is ____(undervalued/ overvalued) and Stock Z is ____(undervalued/ overvalued).
*Stock A has a beta of 1.3 and an expected return of 10.2. Stock B has a beta of 0.8 and an expected return of 8.7. If these stocks are priced correctly according to the CAPM, what is the risk-free rate? Give your answer in percentage to the nearest basis point.
Stock A has a beta of 0.2, and investors expect it to return 3%. Stock B has a beta of 1.8, and investors expect it to return 11%. Use the CAPM to calculate the market risk premium and the expected rate of return on the market. (Enter your answers as a whole percent.) Market risk Premium ______% Expected Market Rate of Return _____%