Firm A has a stock price of $10 per share,an expected dividend for next year of $1 per share,an expected constant growth rate of 8% per year,and a beta of 0.8 on its stock.Firm B has a stock price of $50 per share,an expected dividend for next year of $5.50 per share,a retention rate of 40%,a historical rate of return on investment of 20%,and a beta of 1.3 on its stock.If the riskless rate is 10% and the expected return on the market portfolio is 18%,is either of these stocks underpriced or overpriced? What is your buy/sell recommendation for each stock?

Question

Quizplus · Accepted Answer

The Answer of Firm A has a stock price of $10 per share,an expected dividend for next year of $1 per share,an expected constant growth rate of 8% per year,and a beta of 0.8 on its stock.Firm B has a stock price of $50 per share,an expected dividend for next year of $5.50 per share,a retention rate of 40%,a historical rate of return on investment of 20%,and a beta of 1.3 on its stock.If the riskless rate is 10% and the expected return on the market portfolio is 18%,is either of these stocks underpriced or overpriced? What is your buy/sell recommendation for each stock?

Firm a Has a Stock Price of $10 Per Share,an