Value and Returns A stock has an expected dividend yield of 3.2% a price today o

Question

Value and Returns A stock has an expected dividend yield of 3.2% a price today of $27 and an expected sale price in one year of $28. The stock has a beta of 1.1 and the expected return on the market is 13% while the risk free rate is 4%. This stock is _____________ by ________ basis points.

Value and Returns A stock has an expected dividend yield of 3.2% a price today of $27 and an expected sale price in one year of $28. The stock has a beta of 1.1 and the expected return on the market is 13% while the risk free rate is 4%. This stock is _____________ by ________ basis points.

Explanation / Answer

Answer) Expected return of stock = 4% + 1.1 *(13%-4%) = 13.90%

Dividend = 3.2%*27 = 0.864

Stock total returns = (28 - 27 + 0.864) / 27 =6.90%

Answer:- The stock is undervalued by 690 basis points

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