Explanation:
Expected return on the stock = Risk-free rate + Beta (Market expected return - Risk-free rate) = 5% + 1.8 × (8% − 5%) = 10.4% Expected price = USD 35.12 × 1.104 = USD 38.77 = Analyst estimates of USD 38.77
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Q.54 A stock is trading at USD 35.12, and analysts expect its price in exactly 12 months to be USD 38.77. If the market expected return is 8%, the risk-free rate is 5%, and the Beta of the stock is 1.8, the stock is most likely:
A
Undervalued by USD 3.16
B
Undervalued by USD 6.81
C
Overvalued by USD 3.16
D
Fairly valued
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