Data for Dana Industries is shown below.Now Dana acquires some risky assets that cause its beta to increase by 15.0%.In addition,expected inflation increases by 1.10%.What is the stock's new required rate of return? Do not round your intermediate calculations. Initial beta
1) 00
Initial required return (r_s)
10) 20%
Market risk premium,RP_M
6) 00%
Percentage increase in beta
15) 00%
Increase in inflation premium,IP
1) 10%

Question

Quizplus · Accepted Answer

The correct answer is A because the new required rate of return is 12.20%. The formula for the required rate of return is:r_s = r_f + β * RP_M + IPwhere:r_s is the required rate of returnr_f is the risk-free rateβ is the betaRP_M is the market risk premiumIP is the inflation premiumIn this case, the risk-free rate is not given, so we will assume it is 3.00%. The beta is 1.15, the market risk premium is 6.00%, and the inflation premium is 1.10%. Plugging these values into the formula, we get:r_s = 3.00% + 1.15 * 6.00% + 1.10%r_s = 12.20%

Data for Dana Industries Is Shown Below