Required Rate of Return As an equity analyst you are concerned with what will happen to the required return to Universal Toddler' stock as market conditions change. Suppose rRF = 4%, rM = 8%, and bUT = 2.2. Under current conditions, what is rUT, the required rate of return on UT Stock?
Round your answer to two decimal places. 12.8 %
Now suppose rRF increases to 5%. The slope of the SML remains constant. How would this affect rM and rUT?
I. rM will increase by 1% and rUT will remain the same.
II. Both rM and rUT will decrease by 1%.
III. Both rM and rUT will remain the same.
IV. Both rM and rUT will increase by 1%.
V. rM will remain the same and rUT will increase by 1%.
Suppose rRF decreases to 3%. The slope of the SML remains constant. How would this affect rM and rUT?
I. Both rM and rUT will decrease by 1%.
II. rM will decrease by 1% and rUT will remain the same.
III. rM will remain the same and rUT will decrease by 1%.
IV. Both rM and rUT will increase by 1%.
V. Both rM and rUT will remain the same.
Now assume rRF remains at 4% but rM increases to 10%. The slope of the SML does not remain constant. How would these changes affect rUT?
I. rUT will increase by 4.4%.
II. rUT will remain the same.
III. rUT will decrease by 4.4%. Assume rRF remains at 4% but rM falls to 7%. The slope of the SML does not remain constant.
How would these changes affect rUT?
I. rUT will increase by 2.2%.
II. rUT will remain the same.
III. rUT will decrease by 2.2%.