Your Broker Has Advised You That He Believes That the Stock

question 76

Multiple Choice

Your broker has advised you that he believes that the stock of Brat Inc. is going to rise from $20 to $22.15 per share over the next year. You know that the annual return on the S&P/TSX composite index has been 11.25% and the 90-day T-bill rate has been yielding 4.75% per year over the past 10 years. If beta for Brat is 1.25, 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:

Unused Capacity

The difference between a company's actual production and its maximum potential production if all resources were fully utilized.

Capacity

The maximum level of output that a company can sustain to produce in a given period under normal circumstances.

Machine-Hours

Machine-hours refer to the total time that machinery is in operation, often used as a basis for allocating manufacturing overhead costs.

Unused Capacity

The portion of a company's production capability or resources that is not currently being utilized to generate revenue or output.