Problem:

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.

Required:

Question: 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.

9%, under-valued

9%, over-valued

13.8%, under-valued

13.8%, over-valued

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