Question

20.0 16.0 12.0 REQUIRED RATE OF RETURN(Percent) Return on HC's Stock 8.0 4.0 OS 0 0.5 1.5 1.0 RISK(Beta) Value CAPM Elements Risk-free rate (VRI) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock An analyst believes that inflation is going to increase by 2.0% 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 analyst's prediction. Happy Corp.'s new required rate of return is Tool tip: Mouse over the points on the graph to see their coordinates.

Draw new SML line on graph

Answer 1

Question: Rate of 8 f Retou 47 X Berca 2 Risk free Rate = 1 / Market Risk Premium - Market Returi Risk free Rate 9%-1/ Sell Stock Beta Required Return 9717 Explanation In Greapha X-Axis represents Beta while Y-Axis se presents the Regised Retween which is sur of Risk free Rate and Market Referent The Difference between Y-Axis and x- Axis When [x = 0) is Risk free Reite. CS Scanned with neam Scanner

Ollestion 2: When the inflation in Greases The Required Retean will incrage by the infection Rate when Market risk Premium remains constant 9%+2% Required 1104 Return YA Required Refeon 8 47 Rish t Risk free (Gerce) Return CS Scanned with CamScanner