Landon Stevens is evaluating the expected performance of two common stocks, Furh

Question

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 4.4 percent, the expected return on the market is 10.6 percent, and the betas of the two stocks are 1.4 and 0.7, respectively. Stevens’s own forecasts of the returns on the two stocks are 10.6 percent for Furhman Labs and 10.50 percent for Garten. 1. Calculate the required return for each stock. (Round your answer to 2 decimal places. Omit the "%" sign in your response.) Stock Required return Furhman Labs % Garten Testing % 2. Is each stock undervalued, fairly valued, or overvalued? Furhman Labs Fair valued Overvalued Undervalued Garten Testing Overvalued Fair valued Undervalued

Explanation / Answer

According to capital assets pricing model the expected return on the two stocks will be E(R) = RFR + stock (Rmarket – RFR) Furhman Labs Inc. E (R) =.044+1.4*(.106-.044) 0.1308 13.08 % Garten Labs Inc. E (R)=.044+.7(.106-.044) 0.0874 8.74 % Furhman return is the higher than the London Steavens forecast of 10.6%,implying that stock is overvalued. Garten return is less than the London Steavens forecast of 10.5%,implying that stock is under valued.

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.