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?
Initial beta
1) 00
Initial required return (r_s)
10) 20%
Market risk premium,RP_M
6) 00%
Percentage increase in beta
30) 00%
Increase in inflation premium,IP
2) 00%

Question

Quizplus · Accepted Answer

The correct answer is A because the new required rate of return is 14.00%. The formula for the required rate of return is:r_s = r_f + β * (r_m - r_f) + IPwhere:r_s is the required rate of returnr_f is the risk-free rateβ is the betar_m is the expected market returnIP is the inflation premiumThe risk-free rate is assumed to be 4.00%, the expected market return is assumed to be 10.00%, and the inflation premium is assumed to be 2.00%. The beta is initially 1.00, but it increases by 30% to 1.30.Plugging these values into the formula, we get:r_s = 4.00% + 1.30 * (10.00% - 4.00%) + 2.00%r_s = 14.00%

Data for Atwill Corporation Is Shown Below