Question

Niendorf Corporation's stock has a required return of 13.00%, the risk-free rate is 7.00%, and the market risk premium is 4.00%.

Now suppose there is a shift in investor risk aversion, and the market risk premium increases by 2.00%.

What is Niendorf's new required return?

Answer 1

beta = 1.5

new required return is 16%

Step-by-step explanation:

given data

required return = 13.00%

risk-free rate = 7.00%

market risk premium = 4.00%

market risk premium increases = 2.00%

solution

we know that market interest rate that is express as

market interest rate = risk free interest + beta × risk premium ...............1

put here value and we get beta

13 = 7 + beat × 4

beta = 1.5

and

now when risk premium increase by 2% i.e now 6%

so put here value in equation 1

market interest rate = 7 + 1.5 × 6

market interest rate = 16%

so new required return is 16%