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 rRF $=5\%,$ rM $=10\%,$ and bUT $=1\mathrm{.}4.$

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 market risk premium, RPM$,($i$.$e$.,$ 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$.$ rM will remain the same and rUT will increase by $1$ percentage point.

III. rM will increase by $1$ percentage point and rUT will remain the same.

IV$.$ Both rM and rUT will decrease by $1$ percentage point.

V$.$ Both rM and rUT will remain the same.

$-$Select$-$

Now suppose rRF decreases to $4\%.$ The market risk premium, RPM$,($i$.$e$.,$ the slope of the SML$)$ remains constant. How would this affect rM and rUT?

I. rM will decrease by $1$ percentage point and rUT will remain the same.

II$.$ rM will remain the same and rUT will decrease by $1$ percentage point.

III. Both rM and rUT will increase by $1$ percentage point.

IV$.$ Both rM and rUT will remain the same.

V$.$ Both rM and rUT will decrease by $1$ percentage point.

$-$Select$-$

Now assume rRF remains at $5\%$ but rM increases to $12\%.$ 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$.$ rUT will increase by $2\mathrm{.}8$ percentage point.

III. rUT will decrease by $2\mathrm{.}8$ percentage point.

$-$Select$-$

Now assume rRF remains at $5\%$ but rM falls to $9\%.$ 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$.$ rUT will decrease by $1\mathrm{.}4$ percentage point.

III. rUT will increase by $1\mathrm{.}4$ percentage point.

$-$Select$-$