As an equity analyst you are concerned with what will happen to the required return to Universal Toddler’ stock as market conditions change.

As an equity analyst you are concerned with what will happen to the required return to Universal Toddler’ stock as market conditions change. Suppose rRF = 6%, rM = 10%, and bUT = 1.5.
1. What is rUTI, the required rate of return on UTI Stock? Round your answer to two decimal places.

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  1. Answer

    The required rate of return on UT stock is 12%

    Explanation

    [tex]r_{f}[/tex] = Risk-free rate = 6%

    [tex]r_{m}[/tex] = Market return = 10%

    β [tex]_{ut}[/tex] = 1.5

    [tex]r_{ut}[/tex] = ??

    [tex]r_{ut}[/tex] = [tex]r_{f}[/tex] + β [tex]_{ut}[/tex] ( [tex]r_{m}[/tex] – [tex]r_{f}[/tex] )

    [tex]r_{ut}[/tex] = 6 + 1.5 ( 10 – 6)

    [tex]r_{ut}[/tex] = 12%

    The required rate of return on UT stock is 12%

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