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As an equity analyst you are concerned with what will happen to the required return for Universal Toddler's stock as market conditions change. Suppose
As an equity analyst you are concerned with what will happen to the required return for Universal Toddler's stock as market conditions change. Suppose RF = 3%, TM = 14%, and but = 1.8. a. Under current conditions, what is rut, the required rate of return on UT Stock? Round your answer to one decimal place. b. C. % 1. Now suppose FRF increases to 4%. The market risk premium, RPM, (i.e., the slope of the SML) remains constant. How would this affect M and ruT? I. will increase by 1 percentage point and rur will remain the same. II. Both and UT will decrease by 1 percentage point. III. Both rm and UT will remain the same. IV. Both M and ruT will increase by 1 percentage point. V. will remain the same and ruT will increase by 1 percentage point. -Select- 2. Now suppose RF decreases to 2%. The market risk premium, RPM, (i.e., the slope of the SML) remains constant. How would this affect m and rut? I. Both and ru will increase by 1 percentage point. II. Both and ruT will remain the same. III. Both m and ruT will decrease by 1 percentage point. IV. will decrease by 1 percentage point and ruT will remain the same. V. will remain the same and rut will decrease by 1 percentage point. -Select- 1. Now assume FRF remains at 3% but M increases to 16%. The market risk premium, RPM, (i.e., the slope of the SML) does not remain constant. How would these changes affect ruT? I. rut will remain the same. II. fur will increase by 3.6 percentage point. III. TUT will decrease by 3.6 percentage point. -Select- 2. Now assume FRF remains at 3% but M falls to 13%. The market risk premium, RPM, (i.e., the slope of the SML) does not remain constant. How would these changes affect ruT? I. FUT will increase by 1.8 percentage point. II. TUT will remain the same. III. TUT will decrease by 1.8 percentage point. -Select-
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