You obtained the following information for the TTR stock Mar

You obtained the following information for the TTR stock:

Market price per share at t=0, P0, is $52.

Expected price per share at t=1, E(P1), is $60.

Expected dividend per share during this time period, E(D1), is $1.5.

RF=.05

Beta for the stock=1.4

Market risk premium (RM-RF)=.08

Is the stock currently over- or under-priced?

Select one:

a. Underpriced.

b. Overpriced.

EXPECTED RETURN = (P1 +D1-P0)/P0*100 = (60 + 1.5 - 52)/52 *100 = 18.27%

REQUIRED RATE OF RETURN AS PER CAPM APPROACH

ke = Rf + beta(Rm-Rf) = 5% + 1.4(8%) = 16.2%

EXPECTED RETURN > REQUIRED RATE OF RETURN

SO STOCK IS UNDERPRICED ANSWER