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Suppose the risk-free return is 6 percent and market return is 14 percent. Answer the...

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Finance

Suppose the risk-free return is 6 percent and market return is 14 percent. Answer the questions with the aid of the following information:

Stock Price Today Expected Price after 1 year Expected dividend after 1 year Beta

1 100 125 20 0.8

2 70 77 10 1.7

3 98 104 4 1.2 4 185 190 30 2

a. Calculate the required rate of return using CAPM.

b. Find out whether each stock is undervalued or overvalued or properly valued.

c. If the risk-free return increases to 8, how (a) and (b) changes?

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