Quantitative Problem: You are given the following information for Wine and Cork Enterprises (WCE): rRF = 3%; rM = 10%; RPM = 7%, and beta = 1.1 What is WCE's required rate of return? Round your answer to 2 decimal places. Do not round intermediate calculations. % If inflation increases by 1% but there is no change in investors' market risk premium, 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 market risk premium 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 market risk premium increases by 2%, what is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Quantitative Problem: You are given the following information for Wine and Cork Enterprises (WCE):
rRF = 3%; rM = 10%; RPM = 7%, and beta = 1.1
What is WCE's required
%
If inflation increases by 1% but there is no change in investors' market risk premium, 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 market risk premium 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 market risk premium increases by 2%, what is WCE's required rate of return now? Round your answer to two decimal places. Do not round intermediate calculations.
%
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