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%

---

Definitions:

Net Present Value

A method used to evaluate an investment's profitability by calculating the present values of all cash inflows and outflows.

Delay

The act or instance of postponing or hindering a process, decision, or action.

Projected Cash Inflows

Estimated future cash receipts resulting from business activities like sales, dividends, or loan repayments.

Capital Budgeting

The process by which a business evaluates and selects long-term investment projects.