Data for Dana Industries is shown below. Now Dana acquires some risky assets tha
ID: 2622863 • Letter: D
Question
- Data for Dana Industries is shown below. Now Dana acquires some risky assets that cause its beta to increase by 25%. In addition, expected inflation increases by 1.30%. What is the stock's new required rate of return?
Initial beta 1.00 Initial required return (rs) 10.20% Market risk premium, RPM 6.00% Percentage increase in beta 25.00% Increase in inflation premium, IP 1.30% 13.00% 10.79% 10.01% 11.18% 16.25%
Initial beta 1.00 Initial required return (rs) 10.20% Market risk premium, RPM 6.00% Percentage increase in beta 25.00% Increase in inflation premium, IP 1.30% 13.00% 10.79% 10.01% 11.18% 16.25% Data for Dana Industries is shown below. Now Dana acquires some risky assets that cause its beta to increase by 25%. In addition, expected inflation increases by 1.30%. What is the stock's new required rate of return?
Initial beta 1.00 Initial required return (rs) 10.20% Market risk premium, RPM 6.00% Percentage increase in beta 25.00% Increase in inflation premium, IP 1.30% 1.00 10.20% 6.00% 25.00% 1.30% 13.00% 10.79% 10.01% 11.18% 16.25% Initial beta 1.00 Initial required return (rs) 10.20% Market risk premium, RPM 6.00% Percentage increase in beta 25.00% Increase in inflation premium, IP 1.30%
Explanation / Answer
Old beta: 1.00
Old rs = rRF + b(RPM) 10.20%
RPM 6.00%
Percentage increase in beta: 25.00%
Increase in IP: 1.3.00%
Find new beta after increase = 1.30
Find old rRF: Old rs = rRF+ b(RPM): 10.2% = rRF + 1.0(6.0%): rRF = 10.2% ? 6.0% = 4.20%
Find new rRF: Old rRF + increase in IP = 5.5%
Find new rs = new rRF + new beta(RPM) 13.00%
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