You are given the following information for Wine and Cork Enterprises (WCE): rRF

Question

You are given the following information for Wine and Cork Enterprises (WCE):

rRF = 4%; rM = 7%; RPM = 3%, 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 3% 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 1%. 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 3% and risk aversion increases by 1%, what is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations.
%

Explanation / Answer

CAPM

Re = Rf + Beta*RPM

Re = 4% + 1*3% = 7%

b)

Inflation increases by 3%

If inflation increases Rf will increase by amount of inflation raise => Required return also increases by same %

Re = (4%+3%) + 1*3% =10%

c)

Risk aversion increases by 1%

When risk aversion changes RPM is also changes by same %

Re = 4% + 1*(3%+1%) = 8%

d)

If inflation increases by 3% and risk aversion by 1%

Re = (4%+3%) + 1*(3%+1%) = 11%

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