CCC Corp has a beta of 1.5 and is currently in equilibrium.The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00%.Now the required return on an average stock increases by 30.0% (not percentage points).Neither betas nor the risk-free rate change.What would CCC's new required return be? Do not round your intermediate calculations.
A) 16.34%
B) 18.15%
C) 14.19%
D) 16.50%
E) 14.69%

Question

Quizplus · Accepted Answer

This problem requires some algebra: 11ea856c_8bcb_258b_9aec_73dcef77076f_TB1222_00 ? Now for the algebra: r_Stock = r_RF + b(RP_M)= r_RF + 1.5(RP_M) r_Market = r_RF + b(RP_M)= r_RF + 1.0(RP_M) ? Now insert known data and transpose: 12% = r_RF + 1.5(RP_M) 12% - r_RF = 1.5(RP_M) ? 10% = r_RF + 1.0(RP_M) 10% - r_RF = 1.0(RP_M) Now subtract the second equation from the first. r_RF and one of the RP_Ms cancel,leaving: 2% = 0.5(RP_M) ? 11ea856c_8bcb_258c_9aec_7b66ac98cdf5_TB1222_00 ?

CCC Corp Has a Beta of 1