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): n,-4%; rs,-10%; RPM·696, and beta-i 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' market risk not round intermediate calculations. premium, what is WCE's required rate of return now? Round your answer to two decimal places. Do Assume now that there is no change in inflation, but market risk premium increases by 1%. what is wce's required rate of return now? Round Do not round intermediate calculations your answer to two decimal places , inflation increases by 3% and premium increases by 1%, what is wCE's fequired rate of return now? Round your answer to two decimal places. Do not round market risk

Explanation / Answer

Risk free rate = 4%

Market Return = 10%

Risk Premium = 6%

Beta = 1

a.

Required rate of return = 4% + (6% × 1.00)

= 4% + 6.00%

= 10.00%

Required rate of return for WCE is 10.00%.

b.

If inflation rate increase by 3% then risk-Free rate increase by 3%. So, new risk-free rate would be 7% and risk premium of investor remains same.

So, New Required rate of return = 7% + (6% × 1.00)

   = 7% + 6.00%

  = 13.00%

New Required rate of return for WCE is 13.00%.

c.

If risk Aversion increase by 1% then risk premium increase by 1%. So, new risk premium would be 7%.

So, New Required rate of return = 4% + (7% × 1.00)

     = 4% + 7.00%

      = 11.00%

New Required rate of return for WCE is 11.00%.

d.

If inflation rate increase by 1% then risk-Free rate increase by 3%. So, new risk-free rate would be 7%. again, risk Aversion increase by 1% then risk premium will increase by 1%. So, new risk premium would be 7%

So, New Required rate of return = 7% + (7% × 1.00)

  = 7% + 7.00%

= 14.00%

New Required rate of return for WCE is 14.00%.

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