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%


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