Recently You Have Received a Tip That the Stock of Bubbly

question 147

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 percent and the 90-day T-bill rate has been yielding 3.75 percent 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:

Cash Flow

The net amount of cash and cash-equivalents being transferred into and out of a business, indicating its liquidity, financial health, and operational efficiency.

Creditors

Individuals, businesses, or entities to whom money is owed by debtors, typically due to the provision of goods, services, or loans.

Cash Flow

The complete spectrum of financial inflow and outflow in a business, vitally affecting its liquidity.

Stockholders

Individuals or entities that own shares in a corporation, giving them certain rights like voting on corporate affairs.