As an Investor You Have a Required Rate of Return

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The Answer is Valuation of Stock A:

Valuation of Stock A: All three are overpriced and should not be bought. (Note: a company whose earnings and dividends are declining may still be attractive if the price is right.) b. The return on A is $1(1 + .07)/$23 + .07 = 11.65%. This return is less than the investor's required rate of return of 14 percent. If a stock is overpriced, that implies the expected (or implied) rate of return is less than the required rate of return. c. Valuation of stock A: If the required rate of return were lower, the valuation would be higher. A previously overvalued stock may now be viewed as being undervalued.

All three are overpriced and should not be bought. (Note: a company whose earnings and dividends are declining may still be attractive if the price is right.)" "b. The return on A is
$1(1 + .07)/$23 + .07 = 11.65%.
This return is less than the investor's required rate of return of 14 percent. If a stock is overpriced, that implies the expected (or implied) rate of return is less than the required rate of return." "c. Valuation of stock A:

If the required rate of return were lower, the valuation would be higher. A previously overvalued stock may now be viewed as being undervalued."

As an Investor You Have a Required Rate of Return

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