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

Question

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

rRF = 4%; rM = 9%; RPM = 5%, and beta = 1.4

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 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 1% 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

WCE's required rate of return = Rf + Beta* MRP = 4% + 1.4*5% = 11%

If inflation increases by 1% , then risk free rate changes from 4% to 5%,so WCEs required rate of return = 5% + 1.4*5% = 12%

If risk aversion increases by 2% then the market risk premium changes from 5% to 7%, WCE's required rate of return = 4% + 1.4*7% = 13.8%

If risk aversion increases by 2% and inflation increases by 1%, then WCE's required rate of return = 5% + 1.4*7% = 14.8%

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