Which statement best explains why Ford recently had a Beta of2.67, while Heinz (

Question

Which statement best explains why Ford recently had a Beta of2.67, while Heinz (maker of Heinz Ketchup and other food products)has a Beta of 0.61?

               A.   Because Ford has a lower stock price than Heinz

               B. Because consumers will keep buying Heinz food products inan economic downturn

                     while they may postpone purchase of a new Ford vehicle.

C. Because Ford’sheadquarter is in Michigan, in the middle of the US, making it moresensitive to nationwide trends, while Heinz is based in Pittsburgh,near the East Coast of the United States.

D. Because Heinz pays adividend and Ford does not

Explanation / Answer

Answer:

Statement A is right which told us that Ford has a lower stockprice than Heinz. We know that higher the market beta, higher therisk and hence higher the return! Expected rate of return’sformula can tell us that any increase in beta will increase therisk and expected return!

Expected Rate of Return = r = rf + ß (rm - rf)

And we also know that, price of stock and expected rate ofreturn are inversely proportional to each other, an increase in onewill decrease other and vice versa!

Stock Price = (Dividends Paid (Div) + Expected Price (P1)) / (1+ Expected Return (R))

(An increase in expected return indenominator will decrease the stock price innumerator!)

So Ford has higher market beta of 2.67 than Heinz has only 0.61,so higher market beta means higher expected return, and higherexpected return will decrease the price, and hence lower stockprice. Means Ford has lower market price due to high market betathan Heinz, so option A is right!

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.