Porter Plumbing's stock had a required return of 11.75% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%.Then an increase in investor risk aversion caused the market risk premium to rise by 2%.The risk-free rate and the firm's beta remain unchanged.What is the company's new required rate of return? (Hint: First calculate the beta, then find the required return.)
A) 14.38%
B) 14.74%
C) 15.11%
D) 15.49%
E) 15.87%

Question

Quizplus · Accepted Answer

The correct answer is A.The beta can be calculated as follows:Beta = (Required return - Risk-free rate) / Market risk premiumBeta = (11.75% - 5.50%) / 4.75%Beta = 1.3333The new required return can be calculated as follows:Required return = Risk-free rate + Beta * Market risk premiumRequired return = 5.50% + 1.3333 * (4.75% + 2%)Required return = 14.38%

Porter Plumbing's Stock Had a Required Return of 11