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= 8%, rM= 10%, and bUT= 2.0.

Q. Under current conditions, what is rUT, the required rate of return on UT Stock? Round your answer to two decimal places.

Q. Now suppose rRFincreases to 9%. The slope of the SML remains constant. How would this affect rMand rUT?

I.rMwill increase by 1% and rUTwill remain the same.

II.Both rMand rUTwill decrease by 1%.

III.Both rMand rUTwill remain the same.

IV.Both rMand rUTwill increase by 1%.

V.rMwill remain the same and rUTwill increase by 1%.

Q. Now suppose rRFdecreases to 7%. The slope of the SML remains constant. How would this affect rMand rUT?

I.Both rMand rUTwill remain the same.

II.Both rMand rUTwill decrease by 1%.

III.rMwill decrease by 1% and rUTwill remain the same.

IV.rMwill remain the same and rUTwill decrease by 1%.

V.Both rMand rUTwill increase by 1%.

Q. Now assume rRFremains at 8% but rMincreases to 12%. The slope of the SML does not remain constant. How would these changes affect rUT?

I.rUTwill decrease by 4%.

II.rUTwill remain the same.

III.rUTwill increase by 4%.

Q. Now assume rRFremains at 8% but rMfalls to 9%. The slope of the SML does not remain constant. How would these changes affect rUT?

I.rUTwill decrease by 2%.

II.rUTwill remain the same.

III.rUTwill increase by 2%.