Company a Has a Beta of 0

question 143

Multiple Choice

Company A has a beta of 0.70, while Company B's beta is 1.20.The required return on the stock market is 11.00%, and the risk-free rate is 4.25%.What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)

• A) 2.75%
• B) 2.89%
• C) 3.05%
• D) 3.21%
• E) 3.38%

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Definitions:

Operating Income

Operating income refers to an organization's earnings before interest and taxes (EBIT), derived from its primary business activities excluding any earnings from investments and other non-operational activities.

Return on Investment

A performance measure used to evaluate the efficiency or profitability of an investment, calculated as the return divided by the cost of the investment.

Percentage

A ratio expressed as a fraction of 100.

Divisional Operating Income

Divisional operating income refers to the profit generated from the operations of a specific division within a company, excluding expenses and incomes that are not directly related to the division's operations.