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You are given the following information for Wine and Cork Enterprises (WCE): rRF = 3%; rM = 7%; RPM = 4%, and beta = 1 What is WCE's required rate of return? Round your answer to 2 decimal places
You are given the following information for Wine and Cork Enterprises (WCE):
rRF = 3%; rM = 7%; RPM = 4%, and beta = 1
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.
Expert Solution
Computation of the required rate of return:-
Required rate of return = rRF + (Beta*RPM)
= 3% + (1 * 4%)
= 3% + 4%
= 7.00%
If inflation increases by 1%, then;
Risk free shall be = 3% + 1% = 4%
Required rate of return = 4% + (1 * 4%)
= 4% + 4%
= 8.00%
If risk aversion increases by 2%, then;
RPM shall be = 4% + 2% = 6%
Required rate of return = 3% + (1 * 6%)
= 3% + 6%
= 9.00%
If inflation increases by 1% and risk aversion increases by 2%, then;
Risk free rate = 3% + 1% = 4%
RPM = 4% + 2% = 6%
Required rate of return = 4% + (1 * 6%)
= 4% + 6%
= 10.00%
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