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Chimney Rock Corporation has a beta coefficient of 14 and a required rate of return of...

Chimney Rock Corporation has a beta coefficient of 14 and a required rate of return of 17 percent market risk premium, r - is currently 7.5 percent. Due to the increasing deficit, the Federal System forecasts that inflation will increase by 1.5 percentage points (150 basis points). If the slo SML is constant, what is Chimney Rock's new required rate of return?

a. 15.00%

b. 16.50%

c. 17.75%

d. 18.50%

e. 20.25%

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Answer #1

Risk free rate=17%-1.4*7.5%=6.5%

New required return=risk free rate+beta*market risk premium=6.5%+1.5%+1.4*7.5%=18.50%

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