Intrinsic Value and Return Concepts (1).
As an automotive industry analyst, you are researching Fiat S.p.A. (Milan Stock Exchange: FIA.MI), a leading Italian headquartered automobile manufacturer. You have assembled the following information and assumptions as of late March 2002:
The current share price of FIA.MI is €15.895 (based on the closing price on 22 March 2002).
Your estimate of FIA.MI’s intrinsic value is €17.26.
Over the course of one year, you expect the mispricing of FIA.MI shares, equal to €17.26 €15.895 = €1.365, to be fully corrected. In addition to the correction of mispricing, you forecast additional price appreciation of €1.22 per share over the course of the year as well as the payment of a cash dividend of €0.6 1.
You estimate that the required rate of return on FIA.MI shares is 10.6 percent a year.
Using the above information:
1. State whether FIA.MI shares are overvalued, fairly valued, or undervalued, based on your forecasts.
2. Calculate the expected one year holding period return on FIA.MI stock.
3. Determine the expected alpha for FIA.MI stock.