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?
$\begin{array}{lr}
\text { Initial beta } & 1.00 \
\text { Initial required return }\left(\mathrm{r}_{\mathrm{s}}\right) & 10.20 \% \
\text { Market risk premium, } \mathrm{RP}_{\mathrm{M}} & 6.00 \% \
\text { Percentage increase in beta } & 30.00 \% \
\text { Increase in inflation premium, IP } & 2.00 \%
\end{array}$

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?
 $\begin{array}{lr}
\text { Initial beta } & 1.00 \
\text { Initial required return }\left(\mathrm{r}_{\mathrm{s}}\right) & 10.20 \% \
\text { Market risk premium, } \mathrm{RP}_{\mathrm{M}} & 6.00 \% \
\text { Percentage increase in beta } & 30.00 \% \
\text { Increase in inflation premium, IP } & 2.00 \%
\end{array}$

Quizplus · Accepted Answer

$\begin{array}{l}
\begin{array} { l } 
\text { Old beta }\
Old r_{S}=1 R F+b\left(R P_{M}\right)\
\mathrm{RPM}_{\mathrm{M}}\
\text { Percentage increase in beta}\
\text { Increase in IP}\
\text { Find new beta after increase =}\
\text { Find old } \mathrm{rRF}_{\mathrm{RF}}: 01 \mathrm{~d}_{\mathrm{S}}=1 \mathrm{RF}+\mathrm{b}\left(\mathrm{RP}_{\mathrm{M}}\right): 10.2 \%=1 \mathrm{RF}+\
1.0(6.0 \%)\
r_ \mathrm{RF}=10.2 \%-6.0 \%=\
(\text { Find new 1RF: Old } r_ \mathrm{RF}+\text { increase in } \mathrm{IP}=\
\text { Find new } r_{\mathrm{S}}=\text { new } r_ \mathrm{RF}+\text { new beta(RPM) }
\end{array}
\begin{array} { l } 
1.00\
10.20 \% \
6.00 \% \
30.00 \% \
2.00 \% \
1.30 \
\ \
4.20 \% \
6.20 \% \
14.00 \%
\end{array}
\end{array}$

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

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