Union Pacific Corporation (ticker: UNP on NYSE)owns transportation companies.Its principal operating company,Union Pacific Railroad Company,links 23 states across the country.After studying UNP's financials,you predict the future return on investment to be 8%.The risk free rate is 4.5%,the expected market return is 10% and UNP's beta is 0.6.Which of the following statements is true about UNP?

Question

Quizplus · Accepted Answer

The equation for the expected return on any security in capital market equilibrium is: E(k_i) = k_F + β_i[E(k_M) - k_F] E(k_i) = 0.045 + 0.6(0.10 - 0.045) E(k_i) = 0.045 + 0.6(0.055) E(k_i) = 0.045 + 0.033 = 0.078 or 7.8% Since the anticipated return on the stock is higher than the equilibrium return, shareholders will be getting a higher return than the market believes they should receive. Therefore, its price is too low and it is undervalued.

Union Pacific Corporation (Ticker: UNP on NYSE)owns Transportation Companies