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Assume that the risk-free rate is 4% and the expected market risk premium is 9%. You are considering buying a share of Company B at
Assume that the risk-free rate is 4% and the expected market risk premium is 9%. You are considering buying a share of Company B at a price of $72. Company B has a beta of 1.2 and is expected to pay a dividend of $2 per share next year. You expect to be able to sell next year for $76 per share. Based on the CAPM, are the shares of Company B undervalued, fairly valued, or overvalued? What is the stock's alpha? Show your work (and be sure to answer the two questions)
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