Bradford Manufacturing company has a beta of 1.45, whileFarley Industries has a

Question

Bradford Manufacturing company has a beta of 1.45, whileFarley Industries has a beta of 0.85. The required return onan index fund that holds the entire stock market is 12.0percent. The risk-free rate of interest is 5 percent. By how much does Brandords's required return exceed Farley'srequired return? Bradford Manufacturing company has a beta of 1.45, whileFarley Industries has a beta of 0.85. The required return onan index fund that holds the entire stock market is 12.0percent. The risk-free rate of interest is 5 percent. By how much does Brandords's required return exceed Farley'srequired return?

Explanation / Answer

Bradford's ManufacturingCompany's Beta 1.45 Farley Industries Beta 0.85 The Required Return onthe Stock Market (or) Market Rate of Return(RM) = 12% Risk-free Rate(Rf) = 5% CalculatingRequired Return of Bradford Manufacturing Company(RE): RE = Rf + ß (RM- Rf) RE = 0.05 +1.45 (0.12 - 0.05) RE = 0.05 +1.45 (0.07) RE = 0.05 +0.1015 RE = 0.1515(or) 15.15% Required Returnof Bradford Manufacturing Company(RE) = 15.15% CalculatingRequired Return of Farley Industries(RE): RE = Rf + ß (RM- Rf) RE = 0.05 +0.85 (0.12 - 0.05) RE = 0.05 +0.85 (0.07) RE = 0.05 +0.0595 RE = 0.1095(or) 10.95% Required Returnof Farley Industries(RE) = 10.95% Differencebetween Bradford's Required Return and Farley's Required Return =15.15% - 10.95% = 4.2% by 4.2% Brandford'sRequired Return exceeds Farley's Required Return Bradford's ManufacturingCompany's Beta 1.45 Farley Industries Beta 0.85 The Required Return onthe Stock Market (or) Market Rate of Return(RM) = 12% Risk-free Rate(Rf) = 5% CalculatingRequired Return of Bradford Manufacturing Company(RE): RE = Rf + ß (RM- Rf) RE = 0.05 +1.45 (0.12 - 0.05) RE = 0.05 +1.45 (0.07) RE = 0.05 +0.1015 RE = 0.1515(or) 15.15% Required Returnof Bradford Manufacturing Company(RE) = 15.15% CalculatingRequired Return of Farley Industries(RE): RE = Rf + ß (RM- Rf) RE = 0.05 +0.85 (0.12 - 0.05) RE = 0.05 +0.85 (0.07) RE = 0.05 +0.0595 RE = 0.1095(or) 10.95% Required Returnof Farley Industries(RE) = 10.95% Differencebetween Bradford's Required Return and Farley's Required Return =15.15% - 10.95% = 4.2% by 4.2% Brandford'sRequired Return exceeds Farley's Required Return

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