Recently You Have Received a Tip That the Stock of Bubbly

question 109

Multiple Choice

Recently you have received a tip that the stock of Bubbly Incorporated is going to rise from $57 to $61 per share over the next year.You know that the annual return on the S&P 500 has been 9.25% and the 90-day T-bill rate has been yielding 3.75% per year over the past 10 years.If beta for Bubbly is 0.85,will you purchase the stock?

• A) Yes, because it is overvalued.
• B) No, because it is overvalued.
• C) No, because it is undervalued.
• D) Yes, because it is undervalued.
• E) Yes, because the expected return equals the estimated return.

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Definitions:

Manufacturing Overhead

All the indirect costs associated with producing a product, excluding the direct costs of labor and materials.

Electrical Motor

A device that converts electrical energy into mechanical energy, commonly used in various applications to drive machinery.

Fixed Manufacturing Overhead

This refers to the consistent costs associated with the manufacturing process that do not vary with the level of production, such as salaries of managers and depreciation of factory equipment.

Overapplied

A situation where the allocated manufacturing overhead cost is greater than the actual overhead incurred.