1.

Castles in the Sand generates a rate of return of 20% on its investments and maintains a plowback ratio of .30. Its earnings this year will be $5 per share. Investors expect a 12% rate of return on the stock.

a.	Find the price and P/E ratio of the firm. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Price	$
P/E ratio

b.	Find the price and P/E ratio of the firm if the plowback ratio is reduced to .20. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Price

$

P/E ratio

2.

The risk-free rate is 7% and the expected rate of return on the market portfolio is 14%.

a.	Calculate the required rate of return on a security with a beta of 1.25. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Required return

%

b.

If the security is expected to return 17%, is it overpriced or underpriced?

	Underpriced
	Overpriced