contestada

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 the current conditions what is rUTI, the required rate of return on UTI Stock?

B. Now suppose rFR (1) increases to 6% or (2) decreases to 4%. The slope of the SMI remains constant. How would this affect rM and rUTI?

C. Now assume rFR remains at 5% but rM (1) increases to 14% or (2) falls to 11%. The slope of the SML does not remain constant. How would these changes affect rUTI?

Respuesta :

emaduet2012

Answer:

Answer for the question  

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 the current conditions what is rUTI, the required rate of return on UTI Stock?

B. Now suppose rFR (1) increases to 6% or (2) decreases to 4%. The slope of the SMI remains constant. How would this affect rM and rUTI?

C. Now assume rFR remains at 5% but rM (1) increases to 14% or (2) falls to 11%. The slope of the SML does not remain constant. How would these changes affect rUTI?

Is given in the attachment.

Explanation:

Ver imagen emaduet2012
saqib097

Answer:

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

rUTI = rRF + (rM - rRF)bUTI

= 5% + (12% -5%)*1.4

= 0.148

= 14.8%

B. Now suppose rFR (1) increases to 6% or (2) decreases to 4%. The slope of the SML remains constant. How would this affect rM and rUTI?

If rRF increases to 6%, rM increases by 1% from 12% to 13% and rUTI will berUTI = rRF + (rM - rRF)bUTI = 6% + (13% - 6%)1.4= 0.158 = 15.8%

If rRF decreases to 4%, rM decreases by 1% from 12% to 11% and rUTI will berUTI = 4% + (11% - 4%)1.4 = 0.138 = 13.8%

C. Now assume rFR remains at 5% but rM (1) increases to 14% or (2) falls to 11%. The slope of the SML does not remain constant. How would these changes affect rUTI?

If RM increases to 14%, rUTI will be

rUTI = 5% + (14% - 5%)1.4 = 0.176 = 17.6%

If RM falls to 11%, rUTI will be

rUTI = 5% + (11% - 5%)1.4 = 0.134 = 13.4%