a. overpriced
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Use the following information to answer questions 1- 2
XQV’s stock is trading at $40. Earnings per share are expected at E1 = $5.00; all will be paid out as dividends. Valuing the stock as a perpetuity P0 =E1 / r, the expected return is 12.5%. The risk-free rate is 6%; the market risk premium is 8%. XQV’s beta is 0.875.
The stock is …………………………………………………..
Group of answer choices
a. overpriced
b. fairly priced
c. underpriced
2. Its alpha is ………..……………………… %.
Expert Solution
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Step 1
Return as per Capital-asset pricing model (CAPM) = Risk-free rate + Beta * Market risk premium
= 6% + 0.875 * 8%
= 13.00%
Step by step
Solved in 4 steps
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