Question

10) Beale Manufacturing Company has a beta of 1.9, and Foley Industries has a beta of 0.85. The required return on an index fund that holds the entire stock market is 12%. The risk-free rate of interest is 3%. By how much does Beale's required return exceed Foley's required return? Round your answer to two decimal places.

______%

Answer 1

Beale Manufacturing Company:

Market Return = 12%
Risk-free Rate = 3%
Beta = 1.9

Required Return = Risk-free Rate + Beta * (Market Return - Risk-free Rate)
Required Return = 3% + 1.9 * (12% - 3%)
Required Return = 20.10%

Foley Industries:

Market Return = 12%
Risk-free Rate = 3%
Beta = 0.85

Required Return = Risk-free Rate + Beta * (Market Return - Risk-free Rate)
Required Return = 3% + 0.85 * (12% - 3%)
Required Return = 10.65%

So, Beale’s required return will exceed Foley’s required return by 9.45% (20.10% - 10.65%)