Question

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.

Answer 1

Answer

The required rate of return on UT stock is 12%

Explanation

$r_{f}$ = Risk-free rate = 6%

$r_{m}$ = Market return = 10%

β $_{ut}$ = 1.5

$r_{ut}$ = ??

$r_{ut}$ = $r_{f}$ + β $_{ut}$ ( $r_{m}$ - $r_{f}$ )

$r_{ut}$ = 6 + 1.5 ( 10 - 6)

$r_{ut}$ = 12%

The required rate of return on UT stock is 12%