Question

Beale Manufacturing Company has a beta of 1.8, and Foley Industries has a beta of 0.85. The required return on an index fund that holds the entire stock market is 12.5%. The risk-free rate of interest is 4.75%. 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's Required Return = Risk free rate + ( Market return - risk free rate ) * Beta

= 4.75% + ( 12.5% - 4.75% ) * 1.8

= 18.7%

Foley Industries Required Return :

Required Return = Risk free rate + ( Market return - risk free rate ) * Beta

= 4.75% + ( 12.5% - 4.75% ) * 0.85

= 11.3375%

The amount by which Beale's required return exceed Foley's required return =

= Beale Manufacturing Company's Required Return - Foley Industries Required Return

= 18.7%- 11.3375%

= 7.3625%

Hence the correct answer is 7.36%