6-7

Require Rate of Return Suppose rRF = 5%, rM = 10%, and rA = 12%

a. Calculate Stock A's beta.

b. If Stock A's beta were 2.0, then what would be A's new required rate of return?

6-8

Require Rate of Return As an equity analyst you are concerned with what will happen to the required return to Universal Toddler Industries's 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 much 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?