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Question(s) / Instruction(s):

A manager believes his firm will earn a 11.0 percent return next year. His firm has a beta of 1.13, the expected return on the market is 10.25 percent, and the risk-free rate is 5.85 percent.

Requirements:

1)            Compute the return the firm should earn given its level of risk.

2)            Determine whether the manager is saying the firm is undervalued or overvalued.

Problem 10-20

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