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Show your working Therory (a) You observe that Stock A with a beta of 1.3 now has an expected return of 14%. Assume that the
Show your working
Therory (a) You observe that Stock A with a beta of 1.3 now has an expected return of 14%. Assume that the risk-free rate is 5% and that the expected return on the market portfolio is 11%. Explain whether Stock A is underpriced or overpriced, using the Capital Asset Pricing Model (CAPM). (2 marks) (b) Suppose stock prices do not reflect the relevant information in media reports in the Wall Street Journal. But stock prices fully reflect the information in past stock prices. According to the Efficient Market Hypothesis (EMH), explain whether the market efficiency is weak-form efficiency, semi-strong-form efficiency, or strong-form efficiency. (2 marks) (c) Briefly explain the over-investment problem from the perspective of the agency costs between debtholders and equity holders. (2 marks) (d) Explain the benefit of paying the dividend, from the perspective of agency costs between management and shareholders. (2 marks) Note: Typing is required. File upload will NOT be accepted. There are 20 lines in total to present yourStep by Step Solution
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