Olter , Inc. is starting its risk management program for the company and has ask

Question

Olter, Inc. is starting its risk management program for the company and has asked for your help in determining critical risk measurements for the firm. The company has identified several factors in the market that they believe are critical for your tasks:

Olter, Inc. is starting its risk management program for the company and has asked for your help in determining critical risk measurements for the firm. The company has identified several factors in the market that they believe are critical for your tasks: The risk-free rate is 6% The required return on the average stock is 13% Olter's average return is 13% Required: What is Olter's beta coefficient? How does the beta coefficient influence the firm's stock value? What is the required rate of return for Olter? In terms of risk, how does Olter compare to the average firm in the market? If Olter's beta increased to 1.6, what would you expect to happen to the required rate of return and what does this mean for the firm?

Explanation / Answer

1.)Re = Rf + beta x Rm -Rf

13 = 6 +x * 13-6

x =1

SO beta=1

2.)Beta shows the relationship of selected stock return with that of market rate of return. If it is one, it means that the market rate of return

and selected rate of return is the same, but if it is more than one, it means that the selected stock rate of return will be higher than market rate of

return and if it is less than one, the rate of return of selected stock will be lower than the market rate of return.

3.)It will be same and equal to 13% as the beta is one.

4.)The risk involved in the Olter stock is the same as the risk involve in the market on average basis, therefore the rate of return is same for both.

5.)The rate of return will go up and it will be 17.20%

The beta shows that the risk involve in the selected stock as compared to the average market risk. The 1.6 beta shows that the risk of Olter has gone up

therefore it return should be more than the average market rate of return and it has gone up from 13% to 17.2%

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