Landon Stevens is evaluating the expected performance of two common stocks, Furh

Question

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 5.0 percent, the expected return on the market is 11.8 percent, and the betas of the two stocks are 1.2 and .7, respectively. Stevens’s own forecasts of the returns on the two stocks are 16.00 percent for Furhman Labs and 11.00 percent for Garten. 1. Calculate the required return for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.) Stock Required Return Furhman Labs % Garten Testing %

Explanation / Answer

Formula for required return on stocks;

Required Return (Rr)= Risk free return (Rf)+ [Expected Market return(Rm)- Risk free return(Rf )]*Beta factor

Rf = 5%,

Rm=11.8%

Beta of Furhman Labs = 1.2

Beta of Garten testing = 0.70

Required return for Furhman Labs = 0.05+ (0.118-0.05)*1.2 =0.05+0.0816=0.1316=13.16%

So , Required return for Furhman Labs=13.16%

Required return for Garten testing =0.05+(0.118-0.05)0.7 =0.05+0.0476=0.0976=9.76%

So, Required return for Garten testing =9.76%

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