A Manager Believes His Firm Will Earn a 16 Percent

question 107

Multiple Choice

A manager believes his firm will earn a 16 percent return next year. His firm has a beta of 1.5, the expected return on the market is 14 percent, and the risk-free rate is 4 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued.

• A) 19 percent, undervalued
• B) 19 percent, overvalued
• C) 22 percent, undervalued
• D) 22 percent, overvalued

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Definitions:

Measurable Facts

Information or data that can be quantified or verified through measurement.

Untestable Explanations

Theories or hypotheses that cannot be empirically tested or verified through observation or experiment.

Spiritual Forces

Entities or energies believed to be beyond the physical world, often associated with religious or metaphysical beliefs.

Objectivity

The quality of being unbiased, unprejudiced, and impartial; dealing with facts without allowing personal feelings to influence them.