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 rRF=5% rM =12% and bUTI = 1.4
A. Under the current conditions what is rUTI, the required rate of return on UTI Stock?
B. Now suppose rFR (1) increases to 6% or (2) decreases to 4%. The slope of the SMI remains constant. How would this affect rM and rUTI?
C. Now assume rFR remains at 5% but rM (1) increases to 14% or (2) falls to 11%. The slope of the SML does not remain constant. How would these changes affect rUTI?
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