As an equity analyst you are concerned with what will happen to the required return to Universal Toddler Industries' stock as market conditions change. Suppose rRF = 5%, rM = 12%, and bUTI = 1.4.
a. Under current conditions, what is rUTI, the required rate of return on UTI stock?
b. Now suppose rRF
(1) Increases to 6% or
(2) Decreases to 4%. The slope of the SML remains constant. How would this affect rM and rUTI?
c. Now assume rRF remains at 5% but rM
(1) Increases to 14% or
(2) Falls to 11%. The slope of the SML does not remain constant. How would these changes affect rUTI?