Question
11. Changesto the security market line The following graph plots the current security market line (SML) and indicates the return that investors require from holding
11. Changesto the security market line
The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC).
Based on the graph, complete the table that follows. (Tool tip: Mouse over the points in the graph to see their coordinates.)
00.51.01.52.020.016.012.08.04.00REQUIRED RATE OF RETURN (Percent)RISK (Beta)
| CAPM Elements | Value |
|---|---|
| Risk-free rate (rRFrRF) | |
| Market risk premium (RPMRPM) | |
| Happy Corp. stocks beta | |
| Required rate of return on Happy Corp. stock |
An analyst believes that inflation is going to increase by 3.60% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML.
Calculate Happy Corp.s new required return. Then, on the graph, use the rectangle symbols to plot the new SML suggested by this analysts prediction. (Tool tip: Mouse over the points in the graph to see their coordinates.)
Happy Corp.s new required rate of return is .
New SML00.40.81.21.62.0201612840REQUIRED RATE OF RETURN (Percent)RISK (Beta)
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Solutions Manual To Accompany Fundamentals Of Corporate Finance
Authors: Richard Brealey
6th Edition
0077265963, 978-0077265960
