Question
Stock Zs beta coefficient is b Z = 0.9. The risk-free rate is 6 percent, and the expected return on an average stock is 11
Stock Zs beta coefficient is b Z = 0.9. The risk-free rate is 6 percent, and the expected return on an average stock is 11 percent. The current price of Stock Z, P 0, is $80; the next expected dividend, D 1, is $2.80; and the stocks expected constant growth rate is 9.5 percent. Which of the following is correct?
| a. | Stock Z is overvalued. Its price will rise to restore equilibrium. | |
| b. | Stock Z is undervalued. Its price will fall to restore equilibrium. | |
| c. | Stock Z is undervalued. Its price will rise to restore equilibrium. | |
| d. | Stock Z is overvalued. Its price will fall to restore equilibrium. | |
| e. | Stock Z is fairly priced and in equilibrium. |
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