Problem: As an equity analyst you are concerned with what will happen to the required return to Universal Toddler Industries's stock as market conditions change. Suppose rRF = 5%, rM = 12%, and bUTI = 1.4.
(1) Under current conditions, what is rUTI, the required rate of return on UTI stock?
(2) Now suppose rRF (1) increases to 6% or (2) decreases to 4%. The slope of the SML remains constant. How would this affect rM and rUTI?
(3) Now suppose rRF remains at 5% but rM (1) increaes to 14% or (2) falls to 11%. The slope of the SML does not remain constant. How would these changes affect rUTI?