Suppose a stock is currently selling for $65, and at this priceyour analysis shows your...

Suppose a stock is currently selling for $65, and at this price your analysis shows your expected rate of return is greater than your required rate of return. Given this information, what should you do? Group of answer choices

Do not buy the stock at $65 because the stock is overpriced.

Buy the stock at $65 because the stock is underpriced.

There is no incentive for you to buy or not buy the stock because the stock is currently priced at the fair equilibrium market price.

There is not enough information to decide whether to buy or not to buy the stock at $65.

Solutions

Expert Solution

The expected rate of return is greater than our required rate of return. This implies that the stock is underpriced because the stock is expected to return more than our required rate of return.

Option B is correct: Buy the stock at $65 because the stock is underpriced.

Option A is incorrect because the stock is underpriced, not overpriced

Option C is incorrect because the stock is not priced at the fair equilibrium market price, it is underpriced

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

Suppose XYZ Corp stock is currently selling for $40 a share. You invest $10,000 of your...

Suppose XYZ Corp stock is currently selling for $40 a share. You invest $10,000 of your own money to buy on margin. The initial margin rate is 60% and the minimum maintenance margin is 30%. The interest rate on margin loan is 8%. The stock paid $1 in dividends per share and you paid $0.50 per share as commission. 1. If the stock price increases to $52 after one year, show the T-Account calculations for Margin calculations and calculate your...

A bond is currently selling for $1,300 and pays $65/year (on an annual basis) for 10...

A bond is currently selling for $1,300 and pays $65/year (on an annual basis) for 10 years. What is the IRR of the bond? (Note that this is the same as asking the bond’s YTM.)

Currently, a company has fixed costs of $32,500, a contribution ratio of 65%, and is selling...

Currently, a company has fixed costs of $32,500, a contribution ratio of 65%, and is selling its product for $12 per unit. If the sales price per unit is increased by $4, how much less will the break-even point in sales be when compared to the current condition? Select one: a. $ 17,500 b. $ 5,932 c. $ 14,411 d. $ 13,414

A share of Amazon stock is currently selling for $1,405. You plan to purchase your first...

A share of Amazon stock is currently selling for $1,405. You plan to purchase your first share in one year in honor of your 22nd birthday. You are concerned that the price will rise by then. To hedge this risk, you enter into a forward contract to buy one share of Amazon stock in one year. Assume that the risk-free rate is 3.5% (APR, semi-annual compounding). • Calculate the appropriate price at which you can contract to buy the asset...

Suppose that LMN stock currently is selling at $79 per share. You buy 500 shares using...

Suppose that LMN stock currently is selling at $79 per share. You buy 500 shares using $30,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 5%. a. What is the percentage increase in the net worth of your brokerage account if the price of LMN immediately changes to: (i) $87.20; (ii) $79; (iii) $70.80? What is the relationship between your percentage return and the percentage change in...

Suppose that LMN stock currently is selling at $48 per share. You buy 400 shares using...

Suppose that LMN stock currently is selling at $48 per share. You buy 400 shares using $14,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 5%. a. What is the percentage increase in the net worth of your brokerage account if the price of LMN immediately changes to: (i) $51.36; (ii) $48; (iii) $44.64? What is the relationship between your percentage return and the percentage change in...

Suppose that LMN stock currently is selling at $78 per share. You buy 250 shares using...

Suppose that LMN stock currently is selling at $78 per share. You buy 250 shares using $10,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 5%. a. What is the percentage increase in the net worth of your brokerage account if the price of LMN immediately changes to: (i) $84.24; (ii) $78; (iii) $71.76? What is the relationship between your percentage return and the percentage change in...

Suppose that LMN stock currently is selling at $62 per share. You buy 300 shares using...

Suppose that LMN stock currently is selling at $62 per share. You buy 300 shares using $12,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 9%. a. What is the percentage increase in the net worth of your brokerage account if the price of LMN immediately changes to: (i) $66.65; (ii) $62; (iii) $57.35? What is the relationship between your percentage return and the percentage change in...

a. Malmentier SA stock is currently priced at $65, and it does not pay dividends. The...

a. Malmentier SA stock is currently priced at $65, and it does not pay dividends. The instantaneous risk-free rate of return is 7%. The instantaneous standard deviation of Malmentier SA stock is 30%. You want to purchase a put option on this stock with an exercise price of $70 and an expiration date 30 days from now. According to the Black-Scholes OPM, you should hold __________ shares of stock per 100 put options to hedge your risk. b. The binomial...

Assume Alpha Ltd is currently trading on the NYSE with a stock price of $65. The...

Assume Alpha Ltd is currently trading on the NYSE with a stock price of $65. The American one-year call option on the stock is trading at $20 with strike price of $65. If the one-year rate of interest is 10% p.a. (continuously compounding), is the call price free from arbitrage or is it too cheap/expensive, assuming that the stock pays no dividends? What if the stock pays a dividend of $5 in one year?

Subjects