Estimate the expected returns using the CAPM

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Reference no: EM131909827

You are given the following information about Wendy's International and Sbarro (pizza and restaurants).

Stock Current Expected Expected Estimated

Price Price Dividends Beta

Wendy's $28.875 $32.625 $1.25 1.05

Sbarro $51.25 $55.875 $0.60 1.25

ERM = .14 RF = .07

a) Estimate the expected returns using the CAPM.

b) Calculate the predicted returns for each stock.

c) Determine which stock is overvalued or/and undervalued. Explain.

d) Explain where the predicted returns would plot (above or below) the SML. Explain.

Reference no: EM131909827

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