Oakdale Furniture Inc. has a beta coefficient of 0.7 and a required rate of return of 15 percent. The market risk premium is currently 5 percent. If the inflation premium increases by 2 percentage points, and Oakdale acquires new assets which increase its beta by 50 percent, what will be Oakdale's new required rate of return?
A) 13.50%
B) 22.80%
C) 18.75%
D) 15.25%
E) 17.00%

Question

Quizplus · Accepted Answer

The new beta is 0.7 * 1.5 = 1.05. The risk-free rate is calculated as 15% - (0.7 * 5%) = 11.5%. With a 2% increase in inflation, the new risk-free rate is 13.5%. The new required rate of return is 13.5% + (1.05 * 5%) = 18.75%.