The all-equity financed Lasar plc has a Beta of 0.8. What rate of return should it seek on new

QUESTION

The all-equity financed Lasar plc has a Beta of 0.8. What rate of return should it seek on new investment: (i) with similar risk to existing activities? (ii) with 25 per cent greater risk compared to existing activities? (iii) with 25 per cent lower risk compared to existing activities? The risk-free rate of interest is 6 per cent, and the expected return on the market portfolio is 11 per cent.
Required Return = Rf + Beta * (Rm Rf) i) Required Return = 6% + 0.8 * (11% 6%) Required Return = 10% ii) New Beta = 0.8 * (1 + 25%) New Beta = 1 Required Return = 6% + 1 * (11% 6%)

uired Return = 11% iii) New Beta = 0.8 * (1 25%) New Beta = 0.6 Required Return = 6% + 0.6 * (11% 6%) Required Return = 9%

ANSWER:

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