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 = 2%; rM = 7%; RPM = 5%, 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 2%. 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 2%, what is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations.
%

Explanation / Answer

a)

Required rate of return= Risk-free rate+(Risk premium*Beta)

                                    = 2%+(5%*1)

                                   = 7.00%

b)

Required rate of return= Risk-free rate+Inflation rate+(Risk premium*Beta)

                                    = 2%+3%+(5%*1)     

                                   = 10.00%

c)

Required rate of return= Risk-free rate+((Risk premium+Growth rate)*Beta)

                                    = 2%+((5%+2%)*1)

                                   = 9.00%

d)

Required rate of return= Risk-free rate+Inflation rate+((Risk premium+Growth rate)*Beta)

                                    = 2%+3%+((5%+2%)*1)       

                                   = 12.00%

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