13) HR Industries (HRD has a beta of 1.8 while LR Industries\' (LRI) beta is 06.

Question

13) HR Industries (HRD has a beta of 1.8 while LR Industries' (LRI) beta is 06. The risk-free rate is 55% dthe required rat percentage points, the real risk-free rate remains constant, the required return on the market falls to 10.5% betas remain constant. After all of these changes, what will be the difference (in percentage points) in the required returns for HRI and LRI? A. 3.8% B. 0.9% C. 1.5% D. 2.4% E. 3.5% e of return on a stock with a beta of l is 12.5%. The expected rate of inflation built into rer falls by and all 09-4 6

Explanation / Answer

Required return of a stock=risk free+beta*(market-risk free)

LR1=5.5%+0.6*(12.5%-5.5%)=9.7%

HR1=5.5%+1.8*(12.5%-5.5%)=18.1%

After changes:

LR1=5.5%-1.5%+0.6*(10.5%-5.5%+1.5%)=7.9%

HR1=5.5%-1.5%+1.8*(10.5%-5.5%+1.5%)=14.7%

Difference=14.7%-7.9%=6.8%

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