Company X Has Beta = 1

question 101

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 stock is 12%.Now the expected rate of inflation built into r_RF 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 Stock X exceed that on Stock Y?

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

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Definitions:

Interest Rates

The percentage charged on borrowed money, or earned through lending money or making investments, over a specified period.

Income Bond

An income bond is a type of bond that only pays interest if the issuing company is profitable, making it a riskier investment than bonds with guaranteed interest payments.

Operating Loss

A situation where a company's operating expenses exceed its gross profit, indicating a loss in its core business operations.

Miss A Payment

A situation where a debtor fails to make an agreed-upon payment to a lender or creditor by the due date.