A Manager Believes His Firm Will Earn a 12 Percent

Multiple Choice

A manager believes his firm will earn a 12 percent return next year. His firm has a beta of 1.2, the expected return on the market is 8 percent, and the risk-free rate is 3 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued.

A) 9 percent, undervalued
B) 9 percent, overvalued
C) 13.8 percent, undervalued
D) 13.8 percent, overvalued