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%. The firm's beta is 1.316. Then an increase in investor risk aversion caused the market risk premium to rise to 6.75%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return?

The new required rate of return is 14.383%

Explanation:

The required rate of return is the minimum return that investors require to invest in a company's stock based on the risk. The required rate of return (r) can be calculated using the CAPM approach which uses the risk free rate, the stock's beta and the market risk premium to calculate a stock's required rate of return. The formula for required rate of return is,

r = rRF + Beta * rpM

r = 0.055 + 1.316 * 0.0675

r = 0.14383 or 14.383%

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