Company has a beta of 1.5 and is currently in equilibrium The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00% Now the required return on an average stock increases by 30.0% (not percentage points) Neither betas nor the risk-free rate change What would DHF's new required return be?
A) 14.89%
B) 15.68%
C) 16.50%
D) 17.33%
E) 18.19%

Question

Quizplus · Accepted Answer

The required return on an average stock increases by 30%, so the new required return is 10% * 1.3 = 13%. Using the CAPM formula: Required Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Since the risk-free rate is constant, the change in market return affects the required return proportionally to the beta. The new required return for DHF is 13% + 1.5 * (13% - 10%) = 16.50%.

Company Has a Beta of 1