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?
|Market Risk Premium =||5.00%|
|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%|
|If Inflation increase by 3%|
|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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