Quantitative Problem: You are given the following information for Wine and Cork Enterprises (WCE):
rRF = 5%; rM = 7%; RPM = 2%, and beta = 1
A) What is WCE's required rate of return? Round your answer to 2
decimal places. Do not round intermediate calculations.
%
B) If inflation increases by 1% but there is no change in
investors' risk aversion, what is WCE's required rate of return
now? Round your answer to two decimal places. Do not round
intermediate calculations.
%
C) Assume now that there is no change in inflation, but risk
aversion increases by 2%. What is WCE's required rate of return
now? Round your answer to two decimal places. Do not round
intermediate calculations.
%
D) If inflation increases by 1% and risk aversion increases by
2%, what is WCE's required rate of return now? Round your answer to
two decimal places. Do not round intermediate calculations.
%
Market Return = 7%
Market Risk premium = 2%
Risk-Free Rate =5%
Beta of WCE = 1
A) Required return = Rf+RPM x beta = 5%+2%x1 = 7%
B) if inflation increase by 1%, Rf will increase by 1%
Rf = 5%+1% = 6%
Therefore, Required return = Rf+RPM x beta = 6%+2%x1 = 8%
C) Risk aversion increases by 2%, RPM will increase by 2%
RPM = 2%+2% = 4%
Therefore, Required return = Rf+RPM x beta = 5%+4%x1 = 9%
D) If inflation increase by 1% and Risk aversion increases by 2%
Rf = 5% + 1% = 6%
RPM = 2%+2% = 4%
Therefore, Required return = Rf+RPM x beta = 6%+4%x1 = 10%
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