Firm a Has a Stock Price of $10 Per Share,an

question 25

Essay

Firm A has a stock price of $10 per share,an expected dividend for next year of $1 per share,an expected constant growth rate of 8% per year,and a beta of 0.8 on its stock.Firm B has a stock price of $50 per share,an expected dividend for next year of $5.50 per share,a retention rate of 40%,a historical rate of return on investment of 20%,and a beta of 1.3 on its stock.If the riskless rate is 10% and the expected return on the market portfolio is 18%,is either of these stocks underpriced or overpriced? What is your buy/sell recommendation for each stock?

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Definitions:

Journalized

The process of recording financial transactions in a company's journal, denoting the first step in the accounting process.

Worksheet

A document or tool used by accountants to prepare financial statements and ensure that debits and credits are in balance, not typically part of the formal accounting records.

Net Loss

The amount by which expenses exceed revenues during a specific period, indicating a financial loss.

Income Statement Columns

The arrangement in the income statement that categorizes financial data, such as revenues, expenses, and net income, to convey a company's financial performance over a period.