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Determine required rate of return on amazon common stock

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Reference no: EM132998382

Consider again the SML given by Equation : Kj=6+8.2Bj and shown in Assume that the risk-free rate (rf) of 6 percent is based on an expected inflation premium of 4 percent. Suppose expected inflation increases by three percentage points to 7 percent.

Problem a. Write an equation for the SML given the increase in the expected (The formula for plotting the SML is required return = risk-free rate of return + beta (market return - risk-free rate of return). inflation premium if all other factors remain constant.

Problem b. Redraw the SML based on the new expected inflation premium.

Problem c. Determine the required rate of return (kj) on Amazon.com common stock before and after the expected increase in inflation. See data for the appropriate beta.

Company                             Value Line Beta

Amazon                              1.05

American Electric Power        0.70

American States Water          0.70

Apple                                    0.95

Reference no: EM132998382

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