Tangshan China's Stock Is Currently Selling for $160

question 103

Multiple Choice

Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China's most recent dividend was $5.50. If the expected risk free rate of return is 3 percent, the expected market premium is 4 percent, and Tangshan has a beta of 1.2, Tangshan's stock would be ________.

• A) overvalued because the market price is higher than the resulting share value
• B) undervalued because the market price is less than the resulting share value
• C) overvalued because the resulting share value is higher than the market value
• D) undervalued because the resulting share value is less than the market value

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Definitions:

Foreign Exchange Risk

The potential for financial losses due to changes in exchange rates affecting the value of foreign-currency-denominated assets and liabilities.

Foreign Exchange Gain

Foreign Exchange Gain arises when a currency transaction results in receiving or paying fewer units of the home currency than initially anticipated due to exchange rate movements.

Option Strike Price

The predetermined price at which the holder of an option can buy (in the case of a call option) or sell (in the case of a put option) the underlying security.

Spot Rate

The current market price used for immediate settlement of a currency, security, or commodity transaction.