Required rate of return: As an equity analyst you are concerned with what will happen to the required return to Universal Toddler Industriess stock as market conditions change. Suppose r RF= 8%, 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 9% or (2) decreases to 7%. The slope of the SML remains constant. How would this affect r M and r UTI ?

c. Now assume r RF remains at 8% but r M (1) increases to 15% or (2) falls to 10%. The slope of the SML does not remain constant. How would these changes affect r UTI ?