Bradford Manufacturing company has a beta of 1.45, whileFarley Industr

QUESTION

Bradford Manufacturing company has a beta of 1.45, whileFarley Industries has a beta of 0.85. The required return onan index fund that holds the entire stock market is 12.0percent. The risk-free rate of interest is 5 percent. By how much does Brandordss required return exceed Farle
Bradfords ManufacturingCompanys Beta 1.45 Farley Industries Beta 0.85 The Required Return onthe Stock Market (or) Market Rate of Return(R M ) = 12% Risk-free Rate(R f ) = 5% CalculatingRequired Return of Bradford Manufacturing Company(R E ): R E = R f (R M R f ) R E = 0.05 1.45 (0.12 0.05) R E = 0.05 1.45 (0.07) R E = 0.05 0.1015 R E = 0.1515(or) 15.15% Required Returnof Bradford Manufacturing Company(R E ) = 15.15% CalculatingRequired Return of Farley Industries(R E ): R E = R

f (R M R f ) R E = 0.05 0.85 (0.12 0.05) R E = 0.05 0.85 (0.07) R E = 0.05 0.0595 R E = 0.1095(or) 10.95% Required Returnof Farley Industries(R E ) = 10.95% Differencebetween Bradfords Required Return and Farleys Required Return =15.15% 10.95% = 4.2% by 4.2% BrandfordsRequired Return exceeds Farleys Required Return

ANSWER:

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