Yonan Corporation's stock had a required return of 11.50% last year,when the risk-free rate was 5.50% and the market risk premium was 4.75%.Now suppose there is a shift in investor risk aversion,and the market risk premium increases by 2%.The risk-free rate and Yonan's beta remain unchanged.What is Yonan's new required return? (Hint: First calculate the beta,then find the required return.)
A)14.03%
B)14.38%
C)14.74%
D)15.10%

Question

Quizplus · Accepted Answer

The correct answer is A.The beta of Yonan Corporation's stock can be calculated as follows:Beta = (Required return - Risk-free rate) / Market risk premiumBeta = (11.50% - 5.50%) / 4.75%Beta = 1.25The new required return can be calculated as follows:Required return = Risk-free rate + Beta * Market risk premiumRequired return = 5.50% + 1.25 * (4.75% + 2%)Required return = 14.03%

Yonan Corporation's Stock Had a Required Return of 11