Data for Atwill Corporation is shown below.Now Atwill acquires some risky assets that cause its beta to increase by 30%.In addition,expected inflation increases by 2.00%.What is the stock's new required rate of return? $\begin{array}{lr}
\text { Initial beta } & 1.00 \
\text { Initial required return }\left(\mathrm{r}_{\mathrm{s}}\right) & 10.20 \% \
\text { Market risk premium, } \mathrm{RP}_{\mathrm{M}} & 6.00 \% \
\text { Percentage increase in beta } & 30.00 \% \
\text { Increase in inflation premium. IP } & 2.00 \%
\end{array}$

A) 14.00%
B) 14.70%
C) 15.44%
D) 16.21%
E) 17.02%

Question

Data for Atwill Corporation is shown below.Now Atwill acquires some risky assets that cause its beta to increase by 30%.In addition,expected inflation increases by 2.00%.What is the stock's new required rate of return? $\begin{array}{lr}
\text { Initial beta } & 1.00 \
\text { Initial required return }\left(\mathrm{r}_{\mathrm{s}}\right) & 10.20 \% \
\text { Market risk premium, } \mathrm{RP}_{\mathrm{M}} & 6.00 \% \
\text { Percentage increase in beta } & 30.00 \% \
\text { Increase in inflation premium. IP } & 2.00 \%
\end{array}$

A) 14.00%
B) 14.70%
C) 15.44%
D) 16.21%
E) 17.02%

Quizplus · Accepted Answer

$$\begin{array} {lcc} 
Dld beta &1.00 \
Dldr_{s}=r_{R F}+b\left(R_{M}\right) & 10.20 \% \
 \mathrm{RP}_{\mathrm{M}}&6.00 \% \
Percentage increase in beta& 30.00 \% \
Increase in IP & 2.00 \% \
Find new beta after increase =& 1.30 \
Find old\mathrm{r}_{\mathrm{RF}} Old \mathrm{r}_{\mathrm{s}}=\mathrm{r}_{\mathrm{RF}}+\mathrm{b}\left(\mathrm{R} \mathrm{P}_{\mathrm{M}}\right): 10.2 \%=\mathrm{r}_{\mathrm{RF}}+1.0(6.0 \%): \mathrm{r}_{\mathrm{RF}}=  & 4.20 \% \
10.2 \%-6.0 \%=  &4.20 \% \
Find new  \mathrm{r}_{\mathrm{RF}} : Old \mathrm{r}_{\mathrm{RF}}+  increase in  \mathrm{IP}=  & 6.20 \% \
Find new  r_{s}=new 1_{P F}+ new beta(RPM) &14.00 \%
\end{array}$$

Data for Atwill Corporation Is Shown Below A) 1400% B) 14

Data for Atwill Corporation Is Shown Below A) 1400%
B) 14