Under/Over-Valued Stock a Manager Believes His Firm Will Earn a 7.5

Multiple Choice

Under/Over-Valued Stock A manager believes his firm will earn a 7.5 percent return next year.His firm has a beta of 2,the expected return on the market is 5 percent,and the risk-free rate is 2 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) 8 percent, undervalued
B) 8 percent, overvalued
C) 12 percent, undervalued
D) 12 percent, overvalued