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:

Rent Control

Government policy or laws that set limits on the amount of rent a landlord can charge tenants, often aimed at making housing affordable.

Urban Areas

Areas characterized by higher population density and vast human features in comparison to areas surrounding them.

Vacancy Rate

A measure used in real estate to indicate the percentage of all available units in a rental property, such as apartments or offices, that are vacant or unoccupied at a particular time.

Tax

An obligatory financial contribution or another kind of levy enforced on taxpayers by government entities to support government operations and a range of public spending.