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.) undervaluedb.) overvalued

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Asked Nov 4, 2019
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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

 

 
 
 
 
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Expert Answer

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Step 1

Calculation of Required Return:

The required return is 14.68%.

...
Required Re turn =Riskfree Rate + Beta x (Risk Pr emium - RiskfreeRate)
=[7.90%+1.13x (13.90% - 7.90%)]
0.1468 or14.68%
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Required Re turn =Riskfree Rate + Beta x (Risk Pr emium - RiskfreeRate) =[7.90%+1.13x (13.90% - 7.90%)] 0.1468 or14.68%

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