Question: Question 4 As an equity analyst you are concerned with what will happen to the required return to Universal Toddler' stock as market conditions change.

Question 4

As an equity analyst you are concerned with what will happen to the required return to Universal Toddler' stock as market conditions change. Suppose r_RF = 3%, r_M = 13%, and b_UT = 1.9.

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

b. Now suppose r_RF (1) increases to 4% or (2) decreases to 2%. The slope of the SML remains constant. How would this affect r_M and r_UT?

c. Now assume r_RF remains at 3% but r_M (1) increases to 15% or (2) falls to 12%. The slope of the SML does not remain constant. How would these changes affect r_UT?

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