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"ABC" Corporation's share had a rate return () that equates to 11
"ABC" Corporation's share had a rate return () that equates to 11.50% last year since 1. the market risk premium (MRP) was equal to 4.75%. and 2. the risk-free rate (R) on US treasury bills was equal to 5.50%. Now assume that there is a change in investor risk aversion and the market risk premium rises by 2%. What is ABC Corporation's new required return if The risk-free rate and "ABC" Corporation's beta remain fixed. ?
Expert Solution
Return = 11.50%
Market risk premium = 4.75%
Risk free return = 5.50%
Return = Risk free return + Beta*Market premium
11.50 = 5.50 + Beta*4.75
Beta = (11.50 - 5.50)/4.75
= 1.26
Now
Market premium = 4.75% + 2 %
= 6.75%
Return
= 5.50 + 1.26*6.75
= 14.005%
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