# Question: Suppose rRF 9 rM 14 and X

Suppose rRF = 9%, rM = 14%, and βX = 1.3.

a. What is rX, the required rate of return on Stock X?

b. Now suppose rRF

(1) Increases to 10 percent

(2) Decreases to 8 percent. The slope of the SML remains constant. How would each change affect rM and rX?

c. Assume rRF remains at 9 percent, but rM

(1) Increases to 16 percent

(2) Decreases to 13 percent. The slope of the SML does not remain constant. How would these changes affect rX?

a. What is rX, the required rate of return on Stock X?

b. Now suppose rRF

(1) Increases to 10 percent

(2) Decreases to 8 percent. The slope of the SML remains constant. How would each change affect rM and rX?

c. Assume rRF remains at 9 percent, but rM

(1) Increases to 16 percent

(2) Decreases to 13 percent. The slope of the SML does not remain constant. How would these changes affect rX?

**View Solution:**## Answer to relevant Questions

Suppose you won the Florida lottery and were offered a choice of $500,000 in cash or a gamble in which you would get $1 million if a head were flipped but $0 if a tail came up.a. What is the expected value of the gamble?b. ...Using the model in File C11, rework Problem 11-27, assuming that a third stock, Stock C, is available for inclusion in the portfolio. Stock C has the following historical returns:Year Stock C’s Return, ¨rC2011 ...Neotech Corporation’s 14 percent coupon rate, semiannual payment, $1,000 par value, 30-year bonds currently sell at a price of $1,353.54. If its marginal tax rate is 40 percent, what is Neotech’s after-tax cost of debt?The Shrieves Company’s most recent EPS was $6.50; EPS was $4.42 five years ago. The company pays out 40 percent of its earnings as dividends, and the stock sells for $36.a. Calculate the past growth rate in earnings. b. ...Florida Electric Company (FEC) uses only debt and equity. It can borrow unlimited amounts at an interest rate of 10 percent as long as it finances at its target capital structure, which calls for 45 percent debt and 55 ...Post your question