Stock HB Has a Beta of 1

question 93

Multiple Choice

Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5. The market is in equilibrium, with required returns equalling expected returns. Which of the following statements is correct?

• A) If expected inflation remains constant but the market risk premium (rM - rRF) declines, the required return of Stock LB will decline but the required return of Stock HB will increase.
• B) If both expected inflation and the market risk premium (rM - rRF) increase, the required return on Stock HB will increase by more than that of Stock LB.
• C) If both expected inflation and the market risk premium (rM - rRF) increase, the required returns of both stocks will increase by the same amount.
• D) If expected inflation remains constant but the market risk premium (rM - rRF) declines, the required return on Stock HB will decline but the required return of Stock LB will increase.

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Definitions:

Long-term Capital

Funds or assets held by a company for more than one year, used for financing long-term projects or investments.

Operating Working Capital

The difference between a company's current assets and current liabilities, excluding short-term debt. It reflects the funds that a business requires for day-to-day operations.

Effective Annual Cost

The total cost of borrowing on an annual basis, including interest and any fees, expressed as a percentage of the loan amount.

Trade Credit Terms

Trade credit terms are the conditions agreed upon between a buyer and seller regarding the payment for goods or services, including the repayment period and any discounts for early payment.