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Porter Plumbing's stock had a required return of 11.75% last year, when the risk-free rate was 5.50% 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.)

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Answer:

The answer is: Porter Plumbing's stock new rate of return is 14.38%

Explanation:

First we calculate beta:

beta = (stock's rate of return - risk free rate) / market rate of return

beta = 6.25% / 4.75% = 1.32

If beta remained the same (1.32% and the market rate of return increased by 2%, then to find the new value for Porter's stock (P):

1.32 = (P - risk free rate) / 6.75%    

P - risk free rate = 1.32 x 6.75% = 8.88%

P = 8.88% + risk free rate            

P = 8.88% + 5.50% = 14.38%    

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