Question: 2 Some recent data for Rita Corp's stock, which is currently selling at $12 per...

 

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Question: 2 Some recent data for Rita Corp's stock, which is currently selling at $12 per share, is as follows: (1) initial beta 1.00, (ii) initial required returns 10.20%, and (ii) market risk premium 6.00%. Suppose, as part of its growth initiatives, Rita acquires some risky assets that cause its beta to increase by 50%. In addition, expected inflation increases by 2.50%, leading to proportionate increases in all rates of returns including the risk-free rate from their initial levels. What is the stock's new required rate of return? Now suppose that Rita stock is expected to provide a year-end dividend of $0.50 per share, and that you actually believe that you would be able to sell Rita stock for $14 per share at the end of the year. Will you buy the stock now? Show necessary computations to support your decision. [10 marks] Question: 2 Some recent data for Rita Corp's stock, which is currently selling at $12 per share, is as follows: (1) initial beta 1.00, (ii) initial required returns 10.20%, and (ii) market risk premium 6.00%. Suppose, as part of its growth initiatives, Rita acquires some risky assets that cause its beta to increase by 50%. In addition, expected inflation increases by 2.50%, leading to proportionate increases in all rates of returns including the risk-free rate from their initial levels. What is the stock's new required rate of return? Now suppose that Rita stock is expected to provide a year-end dividend of $0.50 per share, and that you actually believe that you would be able to sell Rita stock for $14 per share at the end of the year. Will you buy the stock now? Show necessary computations to support your decision. [10 marks]

Answer rating: 100% (QA)

Answer 1 The new required rate of return for Rita Corps stock with the increased beta of 150 and increased riskfree rate and market risk premium will ... View the full answer