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 r_RF=5%, r_M= 12%, and b_UTI = 1.4

a) Under current conditions, what is r_UTI, the required rate of return on UTI stock?

b) Now suppose r_RF (1) increases to 6% or (2) decreases to 4%. The slope of the SML remains constant. How would this affect r_M and r_UTI?

c) Now assume r_RF remains at 5% but r_M (1) increases to 14% or (2) falls to 11%. The slope of the SML doesnt remain constant. How would these affect r_UTI?

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%