Under/Over-Valued Stock a Manager Believes His Firm Will Earn a 7.5

Under/Over-Valued Stock A manager believes his firm will earn a 7.5 percent return next year. His firm has a beta of 2, the expected return on the market is 5 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 under-valued or over-valued.

A) 8%, under-valued
B) 8%, over-valued
C) 12%, under-valued
D) 12%, over-valued

Correct Answer:

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