A Business That Is Expected to Generate $160,000 in Cash

Multiple Choice

A business that is expected to generate $160,000 in cash flows for shareholders next year, withperpetual growth expectations of 3% per year, is selling for $1,400,000. Given the business'variability in historical returns, beta is estimated to be 1.1. The current risk free rate is 4% and the current market risk premium is 7.2%. In a competitive market, which of the following is true?

A) the business is correctly priced; you get what you pay for
B) the business is overpriced; walk away
C) cannot be answered with the information provided
D) the business is underpriced; buy