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Partridge Pllastic's stock has an estimated beta of 1.4, and its required return is 13%. Cleaver...

Partridge Pllastic's stock has an estimated beta of 1.4, and its required return is 13%. Cleaver Motors' stock has a beta of 1.2. If the risk-free rate is 6%, what is the required return on Cleaver Motors' stock?
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Answer #1
Using Partridge Pllastic's stock requied return we can find market risk premium
Required rate of return is = Risk free rate of return+(Beta*Market risk premium)
0.13=0.06+(1.40*Market risk premium)
Market risk premium is = (0.13-0.06)/1.40
Market risk premium is = 5.00%
Required return on Cleaver Motors' stock = Risk free rate of return+(Beta*Market risk premium)
Required return on Cleaver Motors' stock = 6%+(1.20*5%)
Required return on Cleaver Motors' stock = 12%
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