Required Rate of Return As an equity analyst you are concerned with what will ha

Question

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 = 896, r 8%, and bUT-2.2 a. Under current conditions, what is ruT, the required rate of return on UT Stock? Round your answer to two decimal places 8% 1. Now suppose rRF increases to 9%. The slope of the SML remains constant. How would this affect rM and rur? I. Both rM and rUT will decrease by 1% II.Both rM and ruT will remain the same 111. Both rM and rUT will increase by 1% IV. rM will remain the same and ruT will increase by 1% V. rM will increase by 1% and ruT will remain the same Select- V 2. Now suppose rRF decreases to 7%. The slope of the SML remains constant. How would this affect rM and rur? I. Both rM and rUT will decrease by 1% 11. rM will decrease by 1% and rUT will remain the same 111. 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 Select- V C. 1. Now assume rRF remains at 8% but rM increases to 10%. The slope of the SML does not remain constant. How would these changes affect ruT? I. ruT will remain the same 11. ruT will increase by 4.4% 111. rUT will decrease by 4.4% Select- V 2. Now assume rRF remains at 8% but I'm 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 111. rUT will decrease by 2.2% Select- V

Explanation / Answer

a-

return

risk free rate + (market return-risk free rate)*beta

8+(8-8)*2.2

8

b-1

3rd

both RM and Rut will increase by 1%

as there is no change in slope

B-2

1st

both RM and Rut will decrease by 1%

as there is no change in slope

c-

2nd

Rut will increase by 4.4% (12.4-9)

8+(10-8)*2.2

12.4

C-2

3rd

Rut will decrease by 2.2% (5.8-8

)

8+(7-8)*2.2

5.8

a-

return

risk free rate + (market return-risk free rate)*beta

8+(8-8)*2.2

8

b-1

3rd

both RM and Rut will increase by 1%

as there is no change in slope

B-2

1st

both RM and Rut will decrease by 1%

as there is no change in slope

c-

2nd

Rut will increase by 4.4% (12.4-9)

8+(10-8)*2.2

12.4

C-2

3rd

Rut will decrease by 2.2% (5.8-8

)

8+(7-8)*2.2

5.8

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