Question

Porter Plumbing's stock had a required return of 10.50% last year, when the risk-free rate was 5.50% 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.) Select the correct answer. a. 12.61% b. 11.71% c. 12.01% d. 12.31% e. 12.91%

Answer 1

Answer:

a. 12.61%

Explanation:

E(r)= Rf + B (Rm- Rf)

10.50% = 5.50% + B (4.75%)

10.50% - 5.50% = B * (4.75%)

5% / 4.75% = B

B = 1.0526

New required rate of return = 5.50% + 1.0526*(4.75%+2%)

New required rate of return = 5.50% + 1.0526*(0.0675)

New required rate of return = 5.50% + 7.11%

New required rate of return = 12.61%