Question

Greshak Company's stock has a beta coefficient of 1.4 and a required rate of return of 14%. The equity risk premium is currently 5%. If the inflation premium increases by 1.0%, and Greshak acquires new assets which increase its beta by 50%, what will be the company’s new required equity rate of return?

Select one:

a. 18.50%

b. 13.50%

c. 22.80%

d. 15.25%

e. 17.00%

Answer #1

Correct answer: **a. 18.50%**

Current Required return = 14%

Current Beta = 1.4

Equity risk premium (market risk premium) = 5%

Current risk free rate = 0.14-1.4*0.05 = 0.07 = 7%

New Beta = 1.4*(1+50%) = 2.1

Inflation premium increases by = 1%

New risk free rate = 0.07+0.01 = 8%

Thus, **New required rate of
return :**

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Round your answer to two decimal places.
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If the stock's beta is less than 1.0, then the change in...

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A stock has a required return of 12%; the risk-free rate is 7%;
and the market risk premium is 3%.
What is the stock's beta? Round your answer to two decimal
places.
If the market risk premium increased to 7%, what would happen
to the stock's required rate of return? Assume that the risk-free
rate and the beta remain unchanged.
If the stock's beta is equal to 1.0, then the change in
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Problem 8-5
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If the market risk premium increased to 9%, what would happen to
the stock's required rate of return? Assume that the risk-free rate
and the beta remain unchanged.
If the stock's beta is equal to 1.0, then the change in...

A stock has a required return of 14%, the risk-free rate is 7%,
and the market risk premium is 4%.
What is the stock's beta? Round your answer to two decimal
places.
If the market risk premium increased to 10%, what would happen
to the stock's required rate of return? Assume that the risk-free
rate and the beta remain unchanged. Do not round intermediate
calculations. Round your answer to two decimal places.
If the stock's beta is greater than 1.0,...

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If the stock's beta is less than 1.0,...

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If the stock's beta is greater than 1.0, then the change in
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