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2 September, 16:43

Data for Hugh's Corporation is provided below. Hugh's recently acquired some risky assets that caused its beta to increase by 30%. What is the stock's new expected rate of return according to the CAPM? Initial beta 1.00 Initial expected return (rs) 10.20% Market risk premium, E (Rm - Rrf) 6.00% Percentage increase in beta 30.00% Increase in inflation premium 2.00%

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  1. 2 September, 17:14
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    The stock's new expected rate of return is 14%

    Explanation:

    Ke=Rf+beta (Mrp-Rf)

    Ke is the cost of capital is 10.20%

    Rf i the risk free rate which is unknown

    beta is 1.00

    (Mrp-Rf) is the market risk premium at 6%

    10.20%=Rf+1.0 (6%)

    10.20%=Rf+6.0%

    Rf=10.20-6.00%

    Rf=4.20%

    Beta for the risky asset is 1.00*130%=1.3

    New risk rate is the old rate plus inflation rate of 2.00%

    new risk free=4.2%+2%=6.2%

    The expected return on the new asset is computed thus:

    Ke=6.2%+1.3 (6%)

    Ke=6.2%+7.8%

    Ke=14%
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Home » Business » Data for Hugh's Corporation is provided below. Hugh's recently acquired some risky assets that caused its beta to increase by 30%. What is the stock's new expected rate of return according to the CAPM? Initial beta 1.
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