Reference no: EM133115730

Firm A has a stock price of $10 per share, an expected dividend for next year of $1 per share, an expected constant annual growth rate of 8% per year, and a beta of 0.8 on its stock. Firm B has a stock price of $50 per share, an expected dividend for next year of $5.50 per share, an expected constant annual growth rate of 8% per year, a historical rate of return on investment of 20%, and a beta of 1.3 on its stock. If the riskless rate is 10% and the expected return on the market portfolio is 18%, is either of these stocks underpriced or overpriced? What is your buy/sell recommendation for each stock?