Question
The real rate of return has been estimated to be 3 percent given current economic conditions. The 30-day risk-free rate (annualized) is 4 percent. Twenty-year
The real rate of return has been estimated to be 3 percent given current economic conditions. The 30-day risk-free rate (annualized) is 4 percent. Twenty-year U.S. government bonds currently yield 8 percent. The yield on 20-year bonds issued by the Forester Hoop Company is 10 percent. Investors require a 17 percent return on Forester's common stock. The common stock of Brown's Forensic Products has a required return of 12 percent. Compute and identify all meaningful risk premiums. Round your answers to the nearest whole number.
Inflation premium:%
Maturity risk:%
Default risk premium (Forester):%
Seniority risk premium (Forester common stock):%
What might account for the difference in the required returns for Brown versus Forester?
Investors may require ahigher or lower? rate of return on Brown's common stock compared to Forester's because Brown may have-greater or lower?business and/or financial risk than Forrester.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started