Question: Stock As beta coefficient is b A = 1.1. The risk-free rate is 4 percent, and the expected return on an average stock is 10

Stock As beta coefficient is b A = 1.1. The risk-free rate is 4 percent, and the expected return on an average stock is 10 percent. The current price of Stock A, P 0, is $40; the next expected dividend, D 1, is $1.80; and the stocks expected constant growth rate is 5.5 percent. Which of the following is correct?

a.

Stock A is undervalued. Its price will fall to restore equilibrium.
b.

Stock A is overvalued. Its price will rise to restore equilibrium.
c.

Stock A is undervalued. Its price will rise to restore equilibrium.
d.

Stock A is fairly priced and in equilibrium.
e.

Stock A is overvalued. Its price will fall to restore equilibrium.

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