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

Question

Problem: You are given the following information for Wine and Cork Enterprises (WCE): rRF = 2%; rM = 10%; RPM = 8%, and beta = 1.2 What is WCE's required rate of return? Round your answer to 2 decimal places. Do not round intermediate calculations % If inflation increases by 1% 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 1% 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

rRF = 2%; rM = 10%; RPM = 8%, and beta = 1.2 a. Required rate of return = rRF + rPM* beta = 2% + 8%*1.2 = 11.60% b. % If inflation increases by 1% rRF increase by same 1%, but risk attitude remains constant Required Rate of Return = 3% + 8% *1.2 = 12.60% SML Shifts upwards c. % If inflation stays constant but risk averseness increases by 1% rRF remains constant, but rPM Increases by 1% Required Rate of Return = 2% + 9% *1.2 = 12.80% SML becomes steeper d. % If inflation and risk averseness both increases by 1% rRF and rPM Increases by 1% Required Rate of Return = 3% + 9% *1.2 = 13.80%

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