Question

a) Calculate the required rate of return for Mars Inc.'s stock. The Mars's beta is 1.7 , the rate on a T-bill is 4 percent, the rate on a long-term T-bond is 5.8 percent, the expected return on the market is 11.5 percent, the market has averaged a 14 percent annual return over the last six years, and Mars has averaged a 14.4 return over the last six years. (Do not include the % sign and round to two decimal places, i.e., 18.31)

b) HR Corporation has a beta of 2.0, while LR Corporation's beta is 0.5. The risk-free rate is 10 percent, and the required rate of return on an average stock is 15 percent. Now the risk-free rate falls by 3 percentage points, the required return on the market falls to 11 percent, and the betas remain constant. When all of these changes are made, what will be the difference in the required returns on HR's and LR's stocks?

1.0%

2.5%

4.5%

5.4%

6.0%