Consider the information below for Calson Corporation Suppos

Consider the information below for Calson Corporation. Suppose that the expected inflation rate and the inflation premium increase by 2.0 percentage points, and Calson acquires risky assets that increase its beta by the indicated percentage. What is the firm\'s new required rate of return? Beta: 1.50 Required return (rs) 10.20% RPM: 6.00% Percentage increase in beta: 20% Question 7 options:

a) 14.00%

b) 15.44%

c) 16.21%

d) 17.02%

Solution

Option A

Risk Free Rate = Beta * Risk Premium - Initial Required return = -1.50 * 6% + 10.20%

Risk Free Rate = 1.20%

Required Beta = Current Beta * (1 + Increase) = 1.50 * 1.20 = 1.8

New Required Return = Risk Free + Inflation increase + Beta * (Risk Premium)

New Required Return = 1.20% + 2% + 1.80 * (6%) = 14.00%