Mikkelson Corporation's stock had a required return of 12.00% last year,when the risk-free rate was 3% and the market risk premium was 4.75%.Then an increase in investor risk aversion caused the market risk premium to rise by 2%.The risk-free rate and the firm's beta remain unchanged.What is the company's new required rate of return? (Hint: First calculate the beta,then find the required return. )Do not round your intermediate calculations.
A) 13.42%
B) 15.79%
C) 18.32%
D) 16.26%
E) 15.63%

Question

Quizplus · Accepted Answer

The original required return is calculated using the CAPM formula: Required Return = Risk-Free Rate + Beta * Market Risk Premium. Rearranging to find Beta: 12% = 3% + Beta * 4.75%, gives Beta = 1.8947. With the increased market risk premium of 6.75% (4.75% + 2%), the new required return is: 3% + 1.8947 * 6.75% = 15.79%.

Mikkelson Corporation's Stock Had a Required Return of 12