Under/Over-Valued Stock a Manager Believes His Firm Will Earn a 12

Multiple Choice

Under/Over-Valued Stock 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 under-valued or over-valued.

A) 9%, under-valued
B) 9%, over-valued
C) 13.8%, under-valued
D) 13.8%, over-valued