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What is the market risk premium of XYZ company, given the following information? • inflation premium = 4% • real risk-free rate = 3% • XYZ Co. beta = 1.5 • Required return = 17.5% Question 52Answera.7%b.14%c.10%

Question

What is the market risk premium of XYZ company, given the following information? • inflation premium = 4% • real risk-free rate = 3% • XYZ Co. beta = 1.5 • Required return = 17.5% Question 52Answera.7%b.14%c.10%

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Solution

The market risk premium can be calculated using the Capital Asset Pricing Model (CAPM), which is:

Required Return = Risk-Free Rate + Beta * Market Risk Premium

We can rearrange the formula to solve for the Market Risk Premium:

Market Risk Premium = (Required Return - Risk-Free Rate) / Beta

The Risk-Free Rate is the sum of the inflation premium and the real risk-free rate, which is 4% + 3% = 7%.

Substituting the given values into the formula:

Market Risk Premium = (17.5% - 7%) / 1.5 = 7%

So, the market risk premium of XYZ company is 7%. Therefore, the answer is a. 7%.

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