Question

Beale Manufacturing Company has a beta of 1.4, and Foley Industries has a beta of 0.8. The required return on an index fund that holds the entire stock market is 10%. The risk-free rate of interest is 6%. By how much does Beale's required return exceed Foley's required return? Round your answer to two decimal places.

%

Answer 1

Required return is calculated as:

Required return=Risk free rate+Beta*(Market return-Risk free rate)
Given that market returns=10% and risk free rate=6%

Required return for Beale with beta value of 1.4 is given by:
Required return=6%+1.4*(10%-6%)=0.06+1.4*(0.04)
=0.06+0.056=0.116 or 11.60%

Required return for Foley industries with beta value of 0.8 is given by:

Required return=6%+0.8*(10%-6%)
=0.06+0.8*(0.04)
=0.06+0.032
=0.092 or 9.20%
Beale's required return exceeds the required return of Foley industries by 11.60%-9.20%=2.40%