Question

22.Mikkelson Corporation's stock had a required return of 12.50% last year, when the risk-free rate was 3% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? (Hint: First calculate the beta, then find the required return.) Do not round your intermediate calculations.

Answer 1

16.50%

Step-by-step explanation:

For computing the required rate of return first we have to find out the beta and then market risk premium and then finally new required rate of return which is shown below:

As we know that

Required rate of return = Risk free rate + Beta ×Market risk premium

12.50% = 3% + Beta × 4.75%

So, the beta is 2%

And,

The new market risk premium is

= 4.75% + 2%

= 6.75%

So, the new required rate of return is

= 3% + 2% × 6.75%

= 3% + 13.5%

= 16.50%