Stock A:

Price= $16.87

Return on common equity = 33.39%

Dividend payment = $1.59

Required rate of return of the investor = 10%

Growth rate = 17.60%

Beta = 1.15

Sector Earning multiple = 18.77x

Actual Earning multiple = 17.22x

Stock B

Price= $34.38

Return on common equity = 27.32%

Dividend payment = $3.19

Required rate of return of the investor = 10%

Growth rate = 10.30%

Beta = 1.38

Sector Earning multiple = 18.77x

Actual Earning multiple = 10.26x

Calculate & Explain Question: DO NOT use CAPM to arrive at a theoretically appropriate RRR, instead assume a RRR of 10% (as stated in the table above) with a Rm = 12% and Rf = 1.5% and recalculate the values of Stock A and Stock B and determine whether overvalued, undervalued or fair value. If you had to choose either A or B, which stock provides the more advantageous value proposition?