Question

Oakdale Furniture Inc. has a beta coefficient of 0.7 and a required rate of return of 15%. The market risk premium is currently 5%. if the inflation premium increases by 2%, and Oakdale acquires new assets that increase its beta by 50%, what will be Oakdale's new required return? a. 13.50% b. 22.80% c. 18.75% d. 15.25% e. 17.00%

Answer 1

c. 18.75%

Step-by-step explanation:

Required return= Risk Free Rate of Return + Beta(Risk Premium)

Required Rate of Return = 15% = kRF + (5%)0.7;

Risk free Rate of Return = kRF

= 15% - 3.5%

kRF = 11.5%.

New kRF = 11.5% + 2.0%

= 13.5%.

New beta = 0.7 * 1.5

= 1.05.

New required rate of return = 13.5% + (5%)1.05

= 18.75%.

Therefore, Oakdale's new required return will be 18.75%