Recently You Have Received a Tip That the Stock of Buttercup

question 141

Multiple Choice

Recently you have received a tip that the stock of Buttercup Industries is going to rise from $76.00 to $85.00 per share over the next year. You know that the annual return on the S&P/TSX composite index has been 13% and the 90-day T-bill rate has been yielding 3% per year over the past 10 years. If beta for Buttercup is 1.0, will you purchase the stock?

• A) Yes, because it is overvalued.
• B) Yes, because it is undervalued.
• C) No, because it is undervalued.
• D) No, because it is overvalued.
• E) Yes, because the expected return equals the estimated return.

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Definitions:

Liabilities

Economic obligations of the company, such as money owed to lenders, suppliers, and employees.

Days Sales Outstanding (DSO)

A financial measure that indicates the average number of days it takes a company to collect payment after a sale has been made.

Goodwill

An intangible asset that arises when a business is acquired for more than the fair value of its net identifiable assets, often attributed to brand reputation, customer relationships, and intellectual property.

Book Value

The value of a company or asset according to its financial statements, calculated as total assets minus intangible assets (patents, copyrights) and liabilities.