1. Under/Over Valued Stock A manager believes his firm will earn a 11.80 percent return next year. His firm has a beta of 1.42, the expected return on the market is 9.2 percent, and the risk-free rate is 4.2 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.
a) 17.264%, over-valued
b) 11.30%, over-valued
c) 11.30%, under-valued
d) 17.264%, under-valued
2. Market Value Ratios Lab R Doors' year-end price on its common stock is $47. The firm has total assets of $77 million, the debt ratio is 53%, no preferred stock, and there are 4.2 million shares of common stock outstanding. Calculate the market-to-book ratio for Lab R Doors.
a) 4.84
b) 11.19
c) .61
d) 5.45