68. Several years ago, the Value Line Investment Survey reported the following m

Question

68.

Several years ago, the Value Line Investment Survey reported the following market betas for the stocks of selected healthcare providers:

Company

Beta

Bonneville Health Group

1.00

Wellness Enterprises

1.15

HEALTHWEST Corporation

1.40

Pacific Healthcare

1.65

At the time these betas were developed, reasonable estimates for the risk-free rate, RF, and required rate of return on the market, R(Rm ), were 7 percent and 14 percent, respectively. What are the required rates of return on the four stocks?

68.

Several years ago, the Value Line Investment Survey reported the following market betas for the stocks of selected healthcare providers:

Company

Beta

Bonneville Health Group

1.00

Wellness Enterprises

1.15

HEALTHWEST Corporation

1.40

Pacific Healthcare

1.65

At the time these betas were developed, reasonable estimates for the risk-free rate, RF, and required rate of return on the market, R(Rm ), were 7 percent and 14 percent, respectively. What are the required rates of return on the four stocks?

Explanation / Answer

Required return = RF + Beta*Market premium

Market premium = RM-RF = 14% - 7% = 7%

Bonneville Health Group; Required return = 7% + 1*7% = 14%

Wellness Enterprises; Required return = 7% + 1.15*7% = 15.05%

Healthwest corporation; Required return = 7% + 1.40*7% = 16.80%

Pacific Healthcare; Required return = 7% + 1.65*7% = 18.55%

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