Question
Stock Ms beta coefficient is b M = 0.9. The risk-free rate is 5 percent, and the expected return on an average stock is 12
Stock Ms beta coefficient is b M = 0.9. The risk-free rate is 5 percent, and the expected return on an average stock is 12 percent. The current price of Stock M, P 0, is $50; the next expected dividend, D 1, is $1.75; and the stocks expected constant growth rate is 3.5 percent. Which of the following is correct?
| a. | Stock M is undervalued. Its price will rise to restore equilibrium. | |
| b. | Stock M is fairly priced and in equilibrium. | |
| c. | Stock M is overvalued. Its price will fall to restore equilibrium. | |
| d. | Stock M is overvalued. Its price will rise to restore equilibrium. | |
| e. | Stock M is undervalued. Its price will fall to restore equilibrium. |
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Corporate Finance A Focused Approach
Authors: Michael C. Ehrhardt, Eugene F. Brigham
4th Edition
1439078084, 978-1439078082
