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 = 5%, rM = 12%, and bUT = 1.8. Under current conditions, what is rUT, the required rate of return on UT Stock? Round your answer to one decimal place. % Now suppose rRF increases to 6%. The slope of the SML remains constant. How would this affect rM and rUT? I. Both rM and rUT will remain the same. II. Both rM and rUT will increase by 1 percentage point. III. rM will remain the same and rUT will increase by 1 percentage point. IV. rM will increase by 1 percentage point and rUT will remain the same. V. Both rM and rUT will decrease by 1 percentage point. Now suppose rRF decreases to 4%. The slope of the SML remains constant. How would this affect rM and rUT? I. Both rM and rUT will increase by 1 percentage point. II. Both rM and rUT will remain the same. III. Both rM and rUT will decrease by 1 percentage point. IV. rM will decrease by 1 percentage point and rUT will remain the same. V. rM will remain the same and rUT will decrease by 1 percentage point. Now assume rRF remains at 5% but rM increases to 14%. The slope of the SML does not remain constant. How would these changes affect rUT? I. rUT will remain the same. II. rUT will increase by 3.6 percentage point. III. rUT will decrease by 3.6 percentage point. Now assume rRF remains at 5% but rM falls to 11%. The slope of the SML does not remain constant. How would these changes affect rUT? I. rUT will decrease by 1.8 percentage point. II. rUT will remain the same. III. rUT will increase by 1.8 percentage point.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 8P

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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 = 5%, r_M = 12%, and b_UT = 1.8.

Under current conditions, what is r_UT, the required rate of return on UT Stock? Round your answer to one decimal place.
%
1. Now suppose r_RF increases to 6%. The slope of the SML remains constant. How would this affect r_M and r_UT?
  I. Both r_M and r_UT will remain the same.
  II. Both r_M and r_UT will increase by 1 percentage point.
  III. r_M will remain the same and r_UT will increase by 1 percentage point.
  IV. r_M will increase by 1 percentage point and r_UT will remain the same.
  V. Both r_M and r_UT will decrease by 1 percentage point.
2. Now suppose r_RF decreases to 4%. The slope of the SML remains constant. How would this affect r_M and r_UT?
  
  I. Both r_M and r_UT will increase by 1 percentage point.
  II. Both r_M and r_UT will remain the same.
  III. Both r_M and r_UT will decrease by 1 percentage point.
  IV. r_M will decrease by 1 percentage point and r_UT will remain the same.
  V. r_M will remain the same and r_UT will decrease by 1 percentage point.
1. Now assume r_RF remains at 5% but r_M increases to 14%. The slope of the SML does not remain constant. How would these changes affect r_UT?
  I. r_UT will remain the same.
  II. r_UT will increase by 3.6 percentage point.
  III. r_UT will decrease by 3.6 percentage point.
2. Now assume r_RF remains at 5% but r_M falls to 11%. The slope of the SML does not remain constant. How would these changes affect r_UT?
  
  I. r_UT will decrease by 1.8 percentage point.
  II. r_UT will remain the same.
  III. r_UT will increase by 1.8 percentage point.

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