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The common stock of Chegg, Inc. has a beta of 1.09 and a current expected return of 16.1 percent. The risk-free rate of return is 4.3 percent and the market rate of return is 12.2 percent. This stock is underpriced because it’s expected rate of return is currently higher the required rate of return of _______ percent.

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Answer:

Re calculated using CAPM = 12.911%

Explanation:

current expected return = 16.1%

if we use capital asset pricing model (CAPM), the cost of equity will be:

Re = risk free + (beta x market premium) = 4.3% + [1.09 x (12.2% - 4.3%)] = 4.3% + (1.09 x 7.9%) = 4.3% + 8.611% = 12.911%

the current expected return is 16.1% - 12.911% = 3.189% higher, which results in underpricing

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