Question

Required Rate of Return

As an equity analyst you are concerned with what will happen to the required return to Universal Toddler Industries stock as market conditions change. Suppose r_RF = 5%, r_M = 10%, and b_UTI = 2.2.

1. Under current conditions, what is r_UTI, the required rate of return on UTI Stock? Round your answer to two decimal places.
   %
   
2. Now suppose r_RF increases to 6%. The slope of the SML remains constant. How would this affect r_M and r_UTI?
   -Select-IIIIIIIVVItem 2
   I. r_M will remain the same and r_UTI will increase by 1%.
   II. r_M will increase by 1% and r_UTI will remain the same.
   III. Both r_M and r_UTI will decrease by 1%.
   IV.Both r_M and r_UTI will remain the same.
   V. Both r_M and r_UTI will increase by 1%.
   
   Suppose r_RF decreases to 4%. The slope of the SML remains constant. How would this affect r_M and r_UTI?
   -Select-VIVIIIIIIItem 3
   I. r_M will remain the same and r_UTI will decrease by 1%.
   II. Both r_M and r_UTI will increase by 1%.
   III. Both r_M and r_UTI will remain the same.
   IV. Both r_M and r_UTI will decrease by 1%.
   V. r_M will decrease by 1% and r_UTI will remain the same.
   
3. Now assume r_RF remains at 5% but r_M increases to 12%. The slope of the SML does not remain constant. How would these changes affect r_UTI?
   -Select-IIIIIIItem 4
   I. r_UTI will increase by 4.4%.
   II. r_UTI will remain the same.
   III. r_UTI will decrease by 4.4%.
   
   Assume r_RF remains at 5% but r_M falls to 9%. The slope of the SML does not remain constant. How would these changes affect r_UTI?
   -Select-IIIIIIItem 5
   I. r_UTI will increase by 2.2%.
   II. r_UTI will remain the same.
   III. r_UTI will decrease by 2.2%.

Answer 1

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