You are given the following information about Wendy's International and Sbarro (pizza and restaurants).

Stock Current Expected Expected Estimated

Price Price Dividends Beta

Wendy's $28.875 $32.625 $1.25 1.05

Sbarro $51.25 $55.875 $0.60 1.25

ERM = .14 RF = .07

a) Estimate the expected returns using the CAPM.

b) Calculate the predicted returns for each stock.

c) Determine which stock is overvalued or/and undervalued.

Explain.

d) Explain where the predicted returns would plot (above or below) the SML. Explain.