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4 sobas stock expected return r 52 14

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Unformatted text preview: a Company’s stock is not correctly priced as according to security m arket line, expe cted return should be 16.4% . (b) "If the security's risk versus expected return is plotted above the SML, it is undervalued because the investor can expect a greater return for the inherent risk" – according to Investopedia's explanation on Security Market Line. [1] Hence, putting ourselves into an investor’s shoes, we suggest that now is the right time we buy the Soba Company’s stock given that it is underpriced . 1 Investopedia, “Security Market Line – SML,” http://www.investopedia.com/terms/s/sml.asp. Page 1 Answers to Q2: (a) Mahalo, Inc.'s debt ratio of 40% means that their capital structure split into 40% debt (i.e. the portion) and 60% equity (i.e. the ! !!! ! !!! portion.) This along with tax rate (T) of 35%, cost of equity (r! ) and cost of debt (...
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