Explore BrainMass
Share

Explore BrainMass

    Rate of Return on a Stock

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    As an equity analyst you are concerned with what will happen to the required return to Universal Toddler Industries's stock as market conditions change. Suppose rRF = 5%, rM = 12%, and bUTI = 1.4.

    (a) Under current conditions, what is rUTI, the required rate of return on UTI stock?
    (b) Now suppose rRF (1) increases to 6% or (2) decreases to 4%. The slope of the SML remains constant. How would this affect rM and rUTI?
    (c) Now suppose rRF remains at 5% but rM (1) increaes to 14% or (2) falls to 11%. The slope of the SML does not remain constant. How would these changes affect rUTI?

    Answer is:

    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%

    I need to be able to show I came up with these answers.

    © BrainMass Inc. brainmass.com October 10, 2019, 7:50 am ad1c9bdddf
    https://brainmass.com/business/the-time-value-of-money/rate-return-stock-597284

    Solution Preview

    (a)
    rUTI = rRF + bUTI*(rM - rRF)
    => rUTI = 5% + 1.4*(12%-5%)
    => rUTI = 14.8%

    (b)
    If rRF increases to 6%
    rM ...

    Solution Summary

    The solution provides step by step solution to the question being asked. Standard formula is used to determine the answer and steps are shown clearly and concisely.

    $2.19