Consider the information below for Postman Builders Inc. Suppose that the expected inflation rate and thus the inflation premium increase by 2.0 percentage points, and Postman acquires risky assets that increase its beta by the indicated percentage. What is the firm's new required rate of return?
beta: $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $$\quad 1.50$
Recquired return $\left( r _ { 5 } \right)$ $ \quad $ $ \quad $$\quad10.20 \%$
RPM: $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $\quad6.00 \%$
Percentage increase in beta: $\quad 20 \%$
A) 14.00%
B) 14.70%
C) 15.44%
D) 16.21%
E) 17.02%

Question

Consider the information below for Postman Builders Inc. Suppose that the expected inflation rate and thus the inflation premium increase by 2.0 percentage points, and Postman acquires risky assets that increase its beta by the indicated percentage. What is the firm's new required rate of return?
beta:  $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $$\quad 1.50$
Recquired return $\left( r _ { 5 } \right)$   $ \quad $ $ \quad $$\quad10.20 \%$
RPM:  $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $\quad6.00 \%$
Percentage increase in beta: $\quad 20 \%$
A) 14.00%
B) 14.70%
C) 15.44%
D) 16.21%
E) 17.02%

Quizplus · Accepted Answer

Old beta: $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $  $ \quad $ $ \quad $ $ \quad $ $ 1.50$
old $r _ { s } = r _ { R } F + b \left( R P _ { M } \right)$  $ \quad $ $ \quad $ $ \quad $  $10.20 \%$
$R \mathrm { RP } _ { \mathrm { M } }$  $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $ \quad $ $6.00 \%$
Percentage increase in beta: $ \quad $ $ \quad $ $ \quad $ $ \quad $$ 20\% $
 
Find new beta after increase = 1.80
 Find old $r _ { \mathrm { R } }$ : $\mathrm { Old } r _ { 5 } = r _ { \mathrm { R } } + \mathrm { b } ( \mathrm { RP } ) : 10.2 \% = r _ { \mathrm { R } } \mathrm { W } + 1.5 ( 6.01 / \mathrm { ) } ) r _ { \mathrm { RF } } = 10.2$ Find new re Old
Find rew TkF: Old rRF + 2.0\% increase in inflation $= 3.20 \%$ 
Find new rs = new rRF + new beta(RPM) = 14.00%

Consider the Information Below for Postman Builders Inc \quad

Consider the Information Below for Postman Builders Inc $\quad$