question archive Consider the information below for XYZ, Inc
Consider the information below for XYZ, Inc
Subject:BusinessPrice:2.87 Bought7
Consider the information below for XYZ, Inc. Suppose that the expected inflation rate and the inflation premium increase by 2.0 percentage points, and XYZ, Inc. acquires risky assets that increase its beta by the indicated percentage. What is the firm's new required rate of return?
Beta: 1.50
Required return (rs) 10.20%
RPM: 6.00%
Percentage increase in beta: 20%
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Answer:
So, Firm's new required rate of return is 14%.
Step-by-step explanation
Initial Required Rate of Return = Risk-free rate + Initia Beta * RPM
10.20% = Risk-free rate + 1.50 * 6%
10.20% = Risk-free Rate + 9%
Risk free rate = 10.20% - 9% = 1.20%
New Required Return = Risk-free Rate + New Beta * RPM + Inflation Premium
= 1.20% + 1.50*(1+20%) * 6% + 2%
= 1.20% + 1.80*6% + 2%
= 1.20% + 10.80% + 2%
New Required Rate of Return = 14%
