Question

Data for Hugh’s Corporation is provided below. Hugh’s recently acquired some risky assets that caused its...

Data for Hugh’s Corporation is provided below. Hugh’s recently acquired some risky assets that caused its beta to increase by 30%. What is the stock's new expected rate of return according to the CAPM?

Initial beta 1.00
Initial expected return (rs) 10.20%
Market risk premium, E(Rm – Rrf) 6.00%
Percentage increase in beta 30.00%
Increase in inflation premium 2.00%
Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Before Acquisition of Risky Assets:

Old Beta = 1.00
Old Expected Return = 10.20%
Market Risk Premium = 6.00%

Old Expected Return = Old Risk-free Rate + Old Beta * Market Risk Premium
10.20% = Old Risk-free Rate + 1.00 * 6.00%
4.20% = Old Risk-free Rate

After Acquisition of Risky Assets:

Increase in Beta = 30.00%
Increase in Inflation Premium = 2.00%

New Beta = Old Beta * (1 + Increase in Beta)
New Beta = 1.00 * 1.30
New Beta = 1.30

New Risk-free Rate = Old Risk-free Rate + Increase in Inflation Premium
New Risk-free Rate = 4.20% + 2.00%
New Risk-free Rate = 6.20%

New Expected Return = New Risk-free Rate + New Beta * Market Risk Premium
New Expected Return = 6.20% + 1.30 * 6.00%
New Expected Return = 14.00%

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Consider the information below for XYZ, Inc. Suppose that the expected inflation rate and the inflation...
Consider the information below for XYZ, Inc. Suppose that the expected inflation rate and the inflation premium increase by 2.0 percentage points, and XYZ, Inc. acquires risky assets that increase its beta by the indicated percentage. What is the firm's new required rate of return? Beta: 1.50 Required return (rs) 10.20% RPM: 6.00% Percentage increase in beta: 20%
You are provided some data about the market: The expected return of the market portfolio is...
You are provided some data about the market: The expected return of the market portfolio is 11.8%, the market's volatility is 13.9%, and the risk-free rate is 2.9%. If the beta of Johnson & Johnson (JNJ) is 0.83, according to the CAPM, what is the expected return of JNJ? {Give your answer as a percentage with 2 decimals, e.g., if the answer is 0.0345224 (or 3.45224%) , enter 3.45 as your answer.} Hint: basic CAPM question. See conclusion 4 of...
Assume that you were recently hired as assistant to Jerry Lehman, financial vp of Coleman technologies....
Assume that you were recently hired as assistant to Jerry Lehman, financial vp of Coleman technologies. Your first task is to estimate Coleman’s cost of capital. Lehman has provided you with the following data, which he believes may be relevant to your task: The firm’s marginal tax rate is 40 percent. The current price of Coleman’s 12 percent coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Coleman does not use short-term interest-bearing debt on a...
Please answer the following Case analysis questions 1-How is New Balance performing compared to its primary...
Please answer the following Case analysis questions 1-How is New Balance performing compared to its primary rivals? How will the acquisition of Reebok by Adidas impact the structure of the athletic shoe industry? Is this likely to be favorable or unfavorable for New Balance? 2- What issues does New Balance management need to address? 3-What recommendations would you make to New Balance Management? What does New Balance need to do to continue to be successful? Should management continue to invest...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT