A manager believes his firm will earn a 16.0 percent return next year. His firm has a beta of 1.50, the expected return on the market is 14.0 percent, and the risk-free rate is 4.0 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.

Possible answers:

22.000%, over-valued

22.000%, under-valued

19.0%, under-valued

19.0%, over-valued