Question

Quantitative Problem: You are given the following information for Wine and Cork Enterprises (WCE):

rRF = 5%; rM = 9%; RPM = 4%, and beta = 1.2

What is WCE's required rate of return? Round your answer to 2 decimal places. Do not round intermediate calculations.
%

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.
%

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.
%

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.
%

Answer 1

1) Required return = risk free rate + beta x market risk premium = 5% + 1.2 x 4% = 9.80%

2) Increased inflation would increase the investors' cost or required return -

Required return = risk free rate + beta x marker risk premium + inflation = 5% + 1.2 x 4% + 1% = 10.80%

3) Increase in risk aversion increases the risk premium -

Required return = risk free rate + beta x (market risk premium + increase in risk aversion) = 5% + 1.2 x (4% + 2%) = 12.20%

4) Required return = risk free rate + beta x (market risk premium + risk aversion) + inflation = 5% + 1.2 x (4% + 2%) + 1% = 13.20%