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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

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:

image text in transcribed

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 3.0% 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 green points (rectangle symbols) to plot the new SML suggested by this analysts prediction.

Happy Corp.s new required rate of return is __????___.

Tool tip: Mouse over the points on the graph to see their coordinates.

image text in transcribed

20.0 16.0 12.0 REQUIRED RATE OF RETURN (Percent) Return on HC's Stock 8.0 4.0 0 0.5 1.5 2.0 1.0 RISK (Beta) 20 New SML 16 REQUIRED RATE OF RETURN (Percent) 00 O 0 0 0.4 1.6 2.0 0.8 1.2 RISK (Beta)

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