Required rate of return as an equity analyst

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Reference no: EM131810927

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%.

Reference no: EM131810927

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