Question

NB Enterprise has a beta of 1.5 and is currently in equilibrium. The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00%. Now the required return on an average stock increases by 30.0% (not percentage points). Neither betas nor the risk-free rate change. What would NB's new required return be?

Answer 1

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As per CAPM
R=Rf+(Rm-Rf)* Beta
therefore we have below equation-
12%=Rf+(10%-Rf)*1.5
12%=	Rf+15%-1.5Rf
0.5Rf=	6.00%
therefore risk free rate =	6%
now we have increase in market risk by 30% = 10%*30%=3%
Using CAPM we can compute now required rate =
New required rate =		=6%+(13%-6%)*1.5
		16.50%
therefore correct answer =		16.50%