Question
In: Finance
Quantitative Problem: You are given the following information for Wine and Cork Enterprises (WCE): rRF =...
Quantitative Problem: You are given the following information
for Wine and Cork Enterprises (WCE):
rRF = 4%; rM = 7%; RPM = 3%, and beta = 1.2
What is WCE's required rate of return? Do not round
intermediate calculations. Round your answer to two decimal
places.
__%
If inflation increases by 2% but there is no change in
investors' risk aversion, what is WCE's required rate of return
now? Do not round intermediate calculations. Round your answer to
two decimal places.
__ %
Assume now that there is no change in inflation, but risk
aversion increases by 1%. What is WCE's required rate of return
now? Do not round intermediate calculations. Round your answer to
two decimal places.
__ %
If inflation increases by 2% and risk aversion increases by
1%, what is WCE's required rate of return now? Do not round
intermediate calculations. Round your answer to two decimal
places.
__ %
Solutions
Expert Solution
As per CAPM the required Rate of return of WCE =Risk Free
Rate+Beta*(Market Return-Risk Free Rate) =4%+1.2*3% =7.60%
When inflation increase by 2% the required Rate of return of WCE
=Inflation + Risk Free Rate+Beta*(Market Return-Risk Free Rate)
=2%+4%+1.2*3% =9.60%
If Risk Aversion increase by 1% then new beta =1.2*(1-1%)
=1.188
As per CAPM the required Rate of return of WCE =Risk Free
Rate+Beta*(Market Return-Risk Free Rate) =4%+1.188*3% =7.56%
When inflation increase by 2% and If Risk Aversion increase by 1%
then new beta =1.2*(1-1%) =1.188
As per CAPM the required Rate of return of WCE =Inflation+Risk Free
Rate+Beta*(Market Return-Risk Free Rate) =2%+4%+1.188*3%
=9.56%
jeff jeffy answered 2 years agoRelated Solutions
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