Question

# Bosco, Inc. has a beta coefficient of 1.5 and a required rate of return of 17%....

Bosco, Inc. has a beta coefficient of 1.5 and a required rate of return of 17%. The market risk premium is currently 5%. If inflation premium increases by 3 percentage points and Bosco invests in a new project which increases its beta by 70 percent, what will be the company's new required rate of return according to the CAPM?

 Using CAPM Market Risk Premium = 5.00% Beta (B)= 1.50 Required Rate of Return= 17% Required Rate of Return ( Ke)= Rf + B x Marker Risk Premium 17%= Rf + 1.50x 5.00% 17%= Rf + 7.50% Rf= 17%-7.5% Rf= 9.50% If Inflation increase by 3% then New Rf= 9.5% + 3 %= 12.5% Market Risk Premium = 5.00% ( no impact of inflation on risk premium) New Beta= 1.5+ 1.5 x 70%= 1.5+1.05 = 2.55 New required rate of return= Rf + B x Marker Risk Premium New required rate of return= 12.5% + 2.55 x 5.00% New required rate of return= 12.5% + 12.75% New required rate of return= 25.25%

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