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mario62 [17]
3 years ago
9

Stock Y has a beta of 1.30 and an expected return of 14.9 percent. Stock Z has a beta of .95 and an expected return of 12.8 perc

ent.
If the risk-free rate is 5.20 percent and the market risk premium is 7.70 percent, are these stocks overvalued or undervalued?
Business
1 answer:
Sever21 [200]3 years ago
6 0

Answer:

Stock Y is overvalued and Stock Z is undervalued.

Explanation:

The stock is fairly valued when the required rate of return on the stock is equal to its expected return. If the expected return on the stock is more than the required rate of return, the stock is undervalued and vice versa.

The required rate of return on the stock is calculated under the CAPM approach suing the following formula.

r = rRF + Beta * rpM

Where,

  • rRf is the risk free rate
  • rpM is the risk premium on market

r of Stock Y = 0.052 + 1.3 * 0.077  =  0.1521 or 15.21%

The required rate of return of Stock Y (15.21%) is more than its expected rate (14.9%) which means the stock is overvalued.

r of Stock Z = 0.052 + 0.95 * 0.077 = 0.12515 or 12.515%

The required rate of return of Stock Z (12.515%) is less than its expected rate (12.8%) which means the stock is undervalued.

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On December 31, Strike Company sold one of its batting cages for $24,440. The equipment had an original cost of $244,400 and has
True [87]

Answer: There was no gain or loss on the sale of this asset.

Explanation: In order to calculate how much profit/loss was made on an asset when it is sold, you have to take the cost price of the asset, and deduct the accumulated depreciation of the asset up to the date of sale. This is known as the book value of the asset, and shows how much it was worth on the day it was sold.

Cost price is the purchase price that the asset was worth on the day it was bought by Strike Company. Accumulated depreciation is the total reduction of the worth of an asset periodically, because of wear and tear.

Book value is calculated as:

Cost price: $244,400

- Accumulated depreciation: ($219,960)

= Book Value = $24,440

However the asset was sold for $24,440. This means that Strike Company sold this asset at its pure value, which is the book value. Thus forfeiting the chance to make a profit, or a loss.

7 0
3 years ago
An agent is discussing an equity index annuity purchase with a client. The agent explains that there are several which she feels
Vesna [10]

Answer:

B) should pack her bags for the trip; she earned it

Explanation:

In this scenario, it can be said that if the client purchases that annuity, the agent should pack her bags for the trip; she earned it. Since the annuity that has been recommended by the agent is offering her an incentive, and the agent fully disclosed that fact to the client, then she did her duty correctly. In the case that the client decides to purchase the annuity, they do so with full knowledge of the potential conflict of interest.

4 0
3 years ago
Rick's Internet Corporation's balance in Retained Earnings is $30,000. The board of directors directs that $15,000 be appropriat
gtnhenbr [62]

<u>Answer</u> is D. remain at $30,000.

<u>Explanation:</u>

Rick's Internet Corporation balance in retained earnings = $30,000

Appropriated earning for future business expansion = $15,000

This appropriated earning set for future use will have no effect on the total retained earnings, because for appropriate retained earnings,  the entry is to debit the retained earnings account.

Also, it would be board's decision if they want to use the money from the retained earnings or add more capital to it.

6 0
3 years ago
Pat can either drive to work, which takes half an hour and uses $1.50 worth of gas, or take the bus, which takes an hour and cos
Harrizon [31]

Answer:

pat should drive if saving half an hour is worth $0.50 or more

Explanation:

Marginal cost is the additional cost generated by producing an additional unit of output.

Marginal cost of taking the bus = 1 / 2 = 0.50

Marginal utility is the additional utility derived from consuming one more unit of a good

Marginal utility per good = marginal utility / price of the good

Pat should take the action that would yield him the highest utility given the marginal cost

So,pat should drive if saving half an hour is worth $0.50 or more

7 0
3 years ago
The following information is known for a buyer of cosmetics: Planned sales for the month $42,000 Planned EOM stock $60,000 Plann
stich3 [128]

Answer:

$25,200

Explanation:

Given that,

Planned sales for the month =  $42,000

Planned EOM stock = $60,000

Planned reductions = $4,800

BOM inventory = $72,000

Merchandise commitments for delivery = $9,600

open-to-buy at retail:

= Planned sales for the month + Planned End of Month Inventory - BOM inventory - Planned reductions

= $42,000 + $60,000 -  $72,000 - $4,800

= $25,200

4 0
3 years ago
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