Answer Happy

8. Changesto the security market line The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows. (Tool tip: mouse over the points in the graph to see their coordinates.) ? 20.0 16.0 12.0 REQUIRED RATE OF RETURN (Percent) 8.0 1 0 0.5 1.5 2.0 1.0 RISK (Beta)

CAPM Elements Value Risk-free rate (rrr) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock An analyst believes that inflation is going to increase by 2.00% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp.'s new required return. Then, on the graph, use the rectangle symbols to plot the new SML suggested by this analyst's prediction. (Tool tip: Mouse over the points in the graph to see their coordinates.) Happy Corp.'s new required rate of return is ? 20 New SML 16 REQUIRED RATE OF RETURN (Percent) 0.4 1,6 2.0 0.8 1.2 RISK (Beta)