XX firm is currently selling for 32, with trailing 12-month earnings and dividends of 1.23 and 0.64, respectively. The Price to Earnings ratio (P/E) is 26, the Price to Book Value ratio (P/BV) is 6.5 and the Price to Sales ratio (P/S) is 2.8. The return on equity is 27 percent and the profit margin on sales is 11 percent. The Treasury bond rate is 4.5 percent, the equity risk premium is 6 percent and XXs beta is 1.3.

1. Calculate the XXs required return, based on the Capital Asset Pricing Model.

2. Assume that the dividend and earnings growth rates are 9.5%. Calculate the P/E, P/BV and P/S ratios that would be justified given the required rate of return in i) and current values of the dividend payout ratio, ROE and profit margin.

3. Given that the assumptions of the constant growth model are appropriate, state whether XX is fairly priced, overpriced, or underpriced.