You are researching GT inc stock. You have assembled the following information a

Question

You are researching GT inc stock. You have assembled the following information and assumptions.

Current Assumptions:

Curren share price = $15.90

Your Estimate of GT's intrinsic value is $17.25

Over the course of one year, you expect the misprice of GT to be fully corrected, you forecast additional price appreciation of $1.22 per share over the course of the year as well as the payment of a cash dividend of $.50

T-bills rate = 3.2%, Market beta = 1.2, Size beta = .5, value beta = .2, equity premium = 4.5, size premium = 2.7, value premium = 4.3

Answer the following questions:

1. State whether GT shares are overhauled, fairly valued, or undervalued, based on your forecast.

2. Calculate the one-year holding-period return on GT stock.

3. Calculate the expected ALPHA for GT stock.

Explanation / Answer

1. Current price is lower than the instrinsic value estimate, so the stock is undervalued.

2. One-year return will be = ((17.25-15.90)+1.22+0.50)/15.90 = 19.31%

3. Expected alpha = exected realized return of portfolio minus (Risk free rate + (equity premium)*beta)

=19.31%-(3.2%+(4.5%)*1.2) = 19.31%- (8.6%) = 10.71%

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