Final answer:
Using the Capital Asset Pricing Model (CAPM), the required rate of return for Manning Enterprises is found to be 12.45% when considering an expected inflation rate of 1.75%, a real risk-free rate of 3.00%, a market risk premium of 7.00%, and a beta of 1.1.
Step-by-step explanation:
To calculate the required rate of return for Manning Enterprises, we need to use the Capital Asset Pricing Model (CAPM), which is a formula that takes into account the risk-free rate, the expected rate of inflation, the market risk premium, and the beta (volatility or systemic risk) of an asset compared to the market as a whole. The formula for CAPM is:
Required Rate of Return = Risk-Free Rate + Beta × (Market Risk Premium)
In this scenario, the risk-free rate is inclusive of the expected inflation rate. Therefore, the adjusted risk-free rate considering the inflation would be 3.00% + 1.75% (expected inflation rate) = 4.75%. Now, applying the CAPM formula:
Required Rate of Return = 4.75% + 1.1 × 7.00%
Required Rate of Return = 4.75% + 7.70%
Required Rate of Return = 12.45%
Hence, the correct answer is B. 12.45%.