15) HR Industries (HRI) has a beta of 1.9, while LR Industries\'s (LRI) beta is

Question

15) HR Industries (HRI) has a beta of 1.9, while LR Industries's (LRI) beta is 0.6. The risk-free rate is 6%, and the required rate of return on an average stock is 13%. The expected rate of inflation built into rRF falls by 1.5 percentage points; the real risk-free rate remains constant; the required return on the market falls to 10.5%; and all betas remain constant. After all of these changes, what will be the difference in the required returns for HRI and LRI? Round your answer to two decimal places.

______%

Explanation / Answer

inflation falls by 1.5%. So risk free rate: 6%-1.5% = 4.5%

Equity risk premium = 10.5%-4.5% = 6%

Expected rate of return (HRI) = 4.5% + 6%*1.9 =15.9%

Expected rate of return (LRI) = 4.5% + 6%*0.6 = 8.1%

difference in expected return = 7.80%

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

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