Company X Has Beta = 1

question 32

Multiple Choice

Company X has beta = 1.6, while Company Y's beta = 0.7.The risk-free rate is 7%, and the required rate of return on an average share is 12%.Now the expected rate of inflation built into rRF rises by 1 percentage point, the real risk-free rate remains constant, the required return on the market rises to 14%, and betas remain constant.After all of these changes have been reflected in the data, by how much will the required return on Share X exceed that on Share Y?

• A) 3.75%
• B) 4.20%
• C) 4.82%
• D) 5.40%
• E) 5.75%

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Definitions:

Need-Satisfying Benefits

The advantages or positive outcomes that a product or service provides to fulfill the specific needs of a customer.

Information Overload

The state of being overwhelmed by the vast amount of information available, making it difficult to make decisions or focus effectively.

Strategic Planning

The process of defining a company's direction and making decisions on allocating its resources to pursue this strategy.

Environmental Data

Information that relates to the natural world and the impact of human activities on it, used in analysis and decision making.