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.  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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