A Manager Believes His Firm Will Earn a 15 Percent

A manager believes his firm will earn a 15 percent return next year. His firm has a beta of 2.1, the expected return on the market is 6 percent, and the risk-free rate is 2 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued.

A) 10.4 percent, undervalued
B) 10.4 percent, overvalued
C) 12.3 percent, undervalued
D) 12.3 percent, overvalued

Correct Answer:

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