question archive Data for KeyKay Industries is shown below
Data for KeyKay Industries is shown below
Subject:FinancePrice:4.89 Bought3
Data for KeyKay Industries is shown below. Now KeyKay acquires some risky assets that cause its beta to increase by 30%. In addition, expected inflation increases by 2.00%. What is the stock's new required rate of return?
Initial beta 1.00
Initial required return (rs) 10.20%
Market risk premium, RPM 6.00%
Percentage increase in beta 30.00%
Increase in inflation premium, IP 2.00%
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Hence, the new required rate of return of stock = 14.00%
Computation of the new required rate of return of stock:-
New beta after increase = 1*(1+30%)
= 1.30
Initial required return = Risk free rate + (Initial beta * Market risk premium)
10.20% = Risk free rate + (1.00 * 6.00%)
Risk free rate = 10.20% - 6.00%
= 4.20%
New required rate of return = Risk free rate + Increase in inflation premium + (New beta * Market risk premium)
= 4.20% + 2.00% + (1.30 * 6.00%)
= 6.20% + 7.80%
= 14.00%
