MOCK 2012 Q89 (noon) purchase, his, expected, required

Iginla2010

if the fund manager’s required rate of return is 13.60% whereas the CAPM cost of equity for a stock is only 12.95% shouldnt the manager invest in the stock since the stock is undervalued?
and since it is also considered as the min. expected rate of return that a company must offer its investors to purchase its shares, shouldn’t the manager invest it in since the rate he can offer his investors are much lower than his required rate of return?

JonnyKay

Here’s a crude way of thinking about it: if you have bills amounting to $13.60 each month and the stock you invested in is only paying you $12.95 a month then that stock sucks and you should sell it for one that will pay you at least $13.60 a month.

liquidity

required rate of return - 13.6% - you would discount at that rate - and arrive at a stock that is cheaper than 1 which you would discount at 12.95% …
say stock cash flow was 100$ - 100/1.136