Question

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 = 5%, rM = 13%, and bUT = 1.8. Under current conditions, what is rUT, the required rate of return on UT Stock? Round your answer to two decimal places. % Now suppose rRF increases to 6%. The slope of the SML remains constant. How would this affect rM and rUT? I. rM will remain the same and rUT will increase by 1%. II. rM will increase by 1% and rUT will remain the same. III. Both rM and rUT will decrease by 1%. IV. Both rM and rUT will remain the same. V. Both rM and rUT will increase by 1%. Now suppose rRF decreases to 4%. The slope of the SML remains constant. How would this affect rM and rUT? I. rM will decrease by 1% and rUT will remain the same. II. rM will remain the same and rUT will decrease by 1%. III. Both rM and rUT will increase by 1%. IV. Both rM and rUT will remain the same. V. Both rM and rUT will decrease by 1%. Now assume rRF remains at 5% but rM increases to 15%. The slope of the SML does not remain constant. How would these changes affect rUT? I. rUT will increase by 3.6%. II. rUT will remain the same. III. rUT will decrease by 3.6%. Now assume rRF remains at 5% but rM falls to 12%. The slope of the SML does not remain constant. How would these changes affect rUT? I. rUT will increase by 1.8%. II. rUT will remain the same. III. rUT will decrease by 1.8%.

Answer 1