Question: As an equity analyst you are concerned with what will happen to the required return toUniversal Toddler's stock as market conditions change. Suppose IRE =

As an equity analyst you are concerned with what will happen to the required return toUniversal Toddler's stock as market conditions change. Suppose IRE

= 5 %,

= 12 %,

and but

= 1.4 .

.

Under current conditions, what is rut, the required rate of return on UT stock?b

.

Now suppose rpr

(1)

increases to

6 %

(2)

decreases to

4 % .

The slope of the SMI remains constant. How would this affect im and rut?c

.

Now assume Ire remains at

5 %

but rm

(1)

increases to

14 %

(2)

falls to

11 % .

The slope of the SML does not remain constant. How would these changes affect rut?

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