Question
8. Prepare the following problems in Excel and ensure the formulas are present in the appropriate cells: As an equity analyst you are concerned with
8. Prepare the following problems in Excel and ensure the formulas are present in the appropriate cells:
As an equity analyst you are concerned with what will happen to the required return to Universal Toddler Industries 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 would 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 doesnt remain constant. How would these affect rUTI?
Answer: a) ri = 14.8%
b) (1) rM= 13%, ri=15.8%
(2) rM= 11%, ri=13.8%
c) (1) ri = 17.6%
(2) ri = 13.4%
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