Example- Overpriced Asset DATA D S0.20 11 4 5 s3.90 b 13
Example - Overpriced Asset DATA: D0 = $0.20 km = 11% g = 4% RF = 5% Ps = $3.90 b = 1.3
Solution- Step 1 Expected Return (Based on Market Price) D s020(1.04) +0.04 $390 0.093or9.3
Solution - Step 1 Expected Return (Based on Market Price): ( ) 0.093 or 9.3% 0.04 $3.90 $0.20 1.04 g P D k s 1 s = = + = +
Solution- Step 2 Required return (based on Systematic Risk): k,=R+b, x(km -) 005+[13×(0.11-005 0.128or12.8
Solution - Step 2 Required Return (Based on Systematic Risk): ( ) ( ) 0.128 or 12.8% 0.05 1.3 0.11- 0.05 k j RF bj km - RF = = + = +
Solution- Step 3 Compare the expected return ks and the required rate of return k <1 OVERPRICED
Solution - Step 3 Compare the expected return ks and the required rate of return kj : ks < kj , OVERPRICED
Solution- Step 4 Correct” Price D P 020(.04 0.128-0.04 $236
Solution - Step 4 “Correct” Price: ( ) $2.36 0.128 - 0.04 $0.20 1.04 k - g D P j 1 s = = =