Explanation Given, For Company B, the value of beta is 1.1. For Company F, the value of beta is 0.30. The required return on the entire stock market is 11%. The risk-free rate of interest is 4.5%. Calculated (working note), The required return on Company B is 11.65%. The required return on Company F is 6.45%. Compute the difference in both the required rate of return on the stock. Formula to calculate difference between required return on stock B and F, Difference in return = Return of stock B − Return of stock F Substitute 11.65% for return of stock B, and 6.45% for return of stock F Difference in return = 11.65 % − 6.45 % = 5.20 % Working note: Required return on stock: The formula to calculate the required rate of return is, r stock = r RF + ( r M − r RF ) × b stock (I) Where, r stock is the required return on the stock. r RF is the risk-free return. r M is the market risk premium. b stock is the value of the stock’s beta. Compute the required rate of return for stock of Company B

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN: 9781337395250

Author: Eugene F. Brigham, Joel F. Houston

Publisher: Cengage Learning

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Question

Chapter 8, Problem 10P

Summary Introduction

To determine: The difference between the required return.

Introduction:

The Required Rate of Return:

The required rate of return is the rate which should be the minimum amount need to be earned on an investment to keep that investment running in the market. When the required return is earned only then the users and the companies invest in that particular investment.

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Chapter 8 Solutions

Fundamentals of Financial Management (MindTap Course List)

Ch. 8 - Prob. 1Q Ch. 8 - Prob. 2Q Ch. 8 - Prob. 3Q Ch. 8 - Is it possible to construct a portfolio of...Ch. 8 - Stock A has an expected return of 7%, a standard...Ch. 8 - A stock had a 12% return last year, a year when...Ch. 8 - If investors aversion to risk increased, would the...Ch. 8 - Prob. 8Q Ch. 8 - In Chapter 7, we saw that if the market interest...Ch. 8 - Prob. 10Q

Ch. 8 - Prob. 11Q Ch. 8 - EXPECTED RETURN A stocks returns have the...Ch. 8 - PORTFOLIO BETA An individual has 20,000 invested...Ch. 8 - REQUIRED RATE OF RETURN Assume that the risk-free...Ch. 8 - Prob. 4P Ch. 8 - BETA AND REQUIRED RATE OF RETURN A stock has a...Ch. 8 - EXPECTED RETURNS Stocks A and B have the following...Ch. 8 - Prob. 7P Ch. 8 - BETA COEFFICIENT Given the following; information,...Ch. 8 - REQUIRED RATE OF RETURN Stock R has a beta of 2.0,...Ch. 8 - Prob. 10P Ch. 8 - CAPM AND REQUIRED RETURN Calculate the required...Ch. 8 - REQUIRED RATE OF RETURN Suppose rRF = 4%, rM =...Ch. 8 - CAPM, PORTFOLIO RISK, AND RETURN Consider the...Ch. 8 - PORTFOLIO BETA Suppose you held a diversified...Ch. 8 - CAPM AND REQUIRED RETURN HR Industries (HRI) has a...Ch. 8 - Prob. 16P Ch. 8 - Prob. 17P Ch. 8 - EXPECTED RETURNS Suppose you won the lottery and...Ch. 8 - EVALUATING RISK AND RETURN Stock X has a 10%...Ch. 8 - REALIZED RATES OF RETURN Stocks A and B have the...Ch. 8 - SECURITY MARKET LINE You plan to invest in the...Ch. 8 - Prob. 22SP Ch. 8 - Prob. 23IC Ch. 8 - Prob. 1TCL Ch. 8 - Prob. 2TCL Ch. 8 - Prob. 3TCL Ch. 8 - Using Past Information to Estimate Required...Ch. 8 - Prob. 5TCL Ch. 8 - Prob. 6TCL Ch. 8 - Prob. 7TCL Ch. 8 - Prob. 8TCL

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Assume that Temp Force has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 7.0%, and that the market risk premium is 5%. What is the required rate of return on the firms stock?

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