A manager believes his firm will earn a return of 16.35 percent next year. His firm has a beta of 1.13, the expected return on the market is 13.90 percent, and the risk-free rate is 7.90 percent.Compute the return the firm should earn given its level of risk. (Round your answer to 2 decimal places.) Required Return: ___.__% Determine whether the manager is saying the firm is undervalued or overvalued. a.) undervalued b.) overvalued

Question

A manager believes his firm will earn a return of 16.35 percent next year. His firm has a beta of 1.13, the expected return on the market is 13.90 percent, and the risk-free rate is 7.90 percent.

Compute the return the firm should earn given its level of risk. (Round your answer to 2 decimal places.)


Required Return: ___.__%


Determine whether the manager is saying the firm is undervalued or overvalued.

a.) undervalued
b.) overvalued

 

 
 
 
 

Expert Answer

1 Rating

Want to see the step-by-step answer?

Check out a sample Q&A here.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.
Tagged in
Business
Finance

Related Finance Q&A

Find answers to questions asked by students like you.

Q: You invest in a portfolio of 5 stocks with an equal investment in each one. The betas of the 5 stock...

A: It is given that weights for each investment is equal, that is, weight for each stock will be (1/5)....

Q: Consider a project to supply Detroit with 40,000 tons of machine screws annually forautomobile produ...

A: a.The cost of equipment is $5,600,000. So, annual depreciation will be ($5,600,000 ÷ 6) = $933,333.3...

Q: The ___ the expected return from a financial asset, the ____ the risk of not getting the money back ...

A: Expected Return of Financial Asset:It is the expected profit or loss that is earned from the investm...

Q: Scenario Probability Stock fund Rate of Return Bond fund Rate of Return Severe recession 0.05 -30 ...

A: Hence the stock fund mean return is 10.35%.The mean return of stock fundt is calculated by multiplyi...

Q: 1. Today, a new release movie ticket costs $8.00. If the average annual inflation rate is 2.5%, who ...

A: Calculation of future value:Answer:Future value of ticket cost is $21.48Definition:Future value is t...

Q: The shareholders of Xyzrox have a preemptive right. Xyzorx has decided to sell 1,000,000 new shares ...

A: Preemptive rights refers to conditions in a security which gives an investor the rights to maintain ...

Q: Anthony and Susan are married filing jointly. Their combined income is currently $98,000. Both have ...

A: Increment of 8,500 will push the taxable income to the level of = Old income + increment = 98,000 + ...

Q: You are considering a loan vs a lease for a new piece of equipment. The price of the equipment is $3...

A: The maximum interest rate the lease can be for payments to be equal to the loan payment is 4%.

Q: The equity versus debt decision relies on a large number of factors such as the existing capital str...

A: As a rule, the superlative capital structure for a business is a capital structure which decreases t...

Q: You are a management trainee in one of the Manufacturing companies based in Johor, Malaysia. The com...

A: The company has the option of financing either through debt or equity. Cost of debt is usually lower...

Q: Which of the following are suppliers of loanable funds?     households     government units ...

A: First question:The suppliers of loanable finds include households, government units and foreign inve...

Q: Eastman Publishing Company is considering publishing a paperbadk textbook on spreadsheet application...

A: Calculate the breakeven point as follows:

Q: Discuss the topic of maximizing shareholder wealth. This topic has been researched and studied for m...

A: Shareholders wealth maximization can be described as the principle which only undertakes the actions...

Q: You lent $290 to a friend for one year at a nominal rate of interest of 3 percent. Inflation during ...

A: Real interest rate is the real return earned on the amount lent which can be calculated by using fis...

Q: Chrome Co. borrows $1,665,000 at an interest rate of 7.32% APR monthly with equal monthly payments o...

A: PV of loan = $ 1,665,000; Annuity payment, A = 15,265;Period = 1 monthinterest rate per period, r = ...

Q: Your company is currently considering two investment projects. Each project requires an upfront expe...

A: Payback period can be defined as the time length required by the project to recover the total cash o...

Q: XYZ company has the following expected cash flows for three scenarios that could occur:            ...

A: In an levered firm, there is no debt amount therefore no interest amount is payable that is 0. The E...

Q: 6:04 IMG_0743.jpg X You are the CFO of Carla Vista, Inc., a retailer of the exercise machine Slimbod...

A: The initial investment cost of store is $33,500,000.According to straight line depreciation, the ann...

Q: A couple plans to save for their child's college education. What principal must be deposited by the ...

A: Present value can be defined as the amount which is to be set aside in order to have a pre-defined s...

Q: A stock has yielded returns of 6 percent, 11 percent, 14 percent, and -2 percent over the past four ...

A: The formula to calculate mean value is given below:

Q: Topic: Payout Policy What is the advantage(s) of dividends against retained earnings?

A: Dividend is the share which is given to the shareholders when from the company's profit. Dividend ca...

Q: Optimal corporation wants to expand their manufacturing facilities. They have two choices, first to ...

A: It is given that firm must incur $290,000 for two years, if it chooses option 1. The second option i...

Q: You choose to invest $2,985 income tax refund check (rather than spend it) in an account earning 5% ...

A: Formula:

Q: The next dividend payment by Grenier, Inc., will be $1.64 per share. The dividends are anticipated t...

A: Calculation of Dividend Yield and Capital Gains Yield:

Q: Consider an asset that costs $665,000 and is depreciated straight-line to zero over its nine-year ta...

A: Calculation of after cash flow from sale of asset:The after-cash flow from sale of asset is $170,296...

Q: Currently working on finance practice problems and need help with setting up the problem, calculatin...

A: Hey, since there are multiple questions posted, we will answer first question. Kindly, post the othe...

Q: Please show all equations and work as needed. Make the correct answer clear. If possible, please typ...

A: Calculation of WACC of firm after leverage (effective after-tax):Answer:WACC after leverage is 15.95...

Q: Hello, It is a three part question. However, I would like to know how the amount of 122, 265, was ca...

A: 3.Calculate the net present value as follows:

Q: need help with all

A: Risk free rate, Rf = 4%CAPM = E(R) = Rf + Beta x (Rm - Rf) where Rm is the expected return from mark...

Q: The common stock of Up-Towne Movers is selling for $33 a share and has a beta of 1.25. If the CAPM e...

A: Calculate the risk-free rate as follows:

Q: Paul and Sandy Moede signed an $8000 note at Citizen's Bank. Citizen's charges a 6.50% discount rate...

A: Computation of effective rate of interest:Hence, the effective rate of interest is 6.87%.

Q: Camber Corporation has to decide if they can finance purchasing 10 new machines for all their manufa...

A: a)Calculation of annual payments:Answer:The annual payment is $3,417,453.45.The actual cost of each ...

Q: You deposit $3000 in an account that pays 88​% interest compounded semiannually. After 33 ​years, th...

A: Amount deposited, P = $ 3,000Future value of P deposited in an account offering annual interest rate...

Q: You would like to have $72,000 available in 15 years. There are two options. Account A has a rate of...

A: Let A and B be the amount to be deposited in Account A and Account B respectively to get the desired...

Q: Rank the following three stocks by their total risk level, highest to lowest. Night Ryder has an ave...

A: Calculation of the Total Risk Level of Night Ryder Stocks, WholeMart Stocks and Fruit Fly Stocks usi...

Q: 6:04 IMG_0741.jpg X Given the soaring price of gasoline, Ford is considering introducing a new produ...

A: To determine the incremental annual cash flow from operations, we need to first compute the contribu...

Q: A pension fund manager is considering three mutual funds.  The first is a stock fund, the second is ...

A: Calculation of Expected Return, Standard Deviation, Sharpe Ratio, Weight of Stock and Weight of Bond...

Q: 6:05 IMG_0742.jpg X Wildhorse Company is considering buying a new farm that it plans to operate for ...

A:  Net present value (NPV): Net present value is one of the most applicable capital budgeting techniqu...

Q: Why are credits and debits different for banks compared for personal finance usage?

A: In personal account, all expenses, assets, and losses will be debited. All incomes, liabilities, and...

Q: Consider a firm with an EBIT of $500,000. The firm finances its assets with $2,000,000 debt (costing...

A: Calculate the change in EPS as follows:

Q: Joey realizes that he has charged too much on his credit card and has racked up $4,300 in debt. If h...

A: Given that the loan amount is $4300, the payment per month is $125, annual percentage rate is 18%, a...

Q: Executives at XYZ Corporation realize that they have too much liquid assets. They want to use this c...

A: Expected return E(R) and standard deviation σ are given by the expressions on the white board. Pi is...

Q: Skolits Corp. issued 15-year bonds 2 years ago at a coupon rate of 7.6 percent. The bonds make semia...

A: Calculate the yield to maturity (YTM) as follows:MS - Excel --> Formulas --> Financials -->...

Q: What's the present value, when interest rates are 8.0 percent, of a $160 payment made every year for...

A: The present value is the today’s value related to the future money at a given rate of return. It is ...

Q: A family spends $46,000 a year in living expenses.If prices increase 3% a year for the next 3 years ...

A: The value of the asset that is expected to be in future due to specified growth rate is known as fut...

Q: Compute the expected return given these three economic states, their likelihoods, and the potential ...

A: Calculation of Expected Return:The expected return is 1.20%.Excel Spreadsheet:

Q: Consider the following three bond quotes: a Treasury bond quoted at 103:17, a corporate bond quoted ...

A: Bonds are usually quoted as a percentage of its par value. Thus, to find the price of the bond follo...

Q: Topic: Capital Budgeting and Valuation with Leverage Is it possible to calculate the unlevered value...

A: APV: It is abbreviated as Adjusted Present Value, is a study which is like the discounted cash flows...

Q: Annual and Average Returns for Stocks, Bonds, and T-Bills, 1950 to 2017      Stocks   Long-Term T...

A: Portfolio return is the combined return on the investment portfolio which is expected by the investo...

Q: A bond has a yield to maturity of 7 percent. The bond matures in 10 years, has a face value of $1,00...

A: Coupon payments are the interest payments received by bondholders from the date a bond is issued til...