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 = 3%, rM = 13%, and bUT = 1.2. Under current conditions, what is rUT, the required rate of return on UT Stock? Round your answer to two decimal places.

Answer 1

The required rate of return on UT Stock is 18.60%

Step-by-step explanation:

In this question, we use the Capital asset pricing model (CAPM) formula

To compute the required rate of return on UT Stock, we need to apply the formula which is presented below:

Required rate of return = rRF + (bUT × rM)

where,

rRF is a risk-free rate of return

bUT is a beta

rM is a market risk

Now put these values to the above formula

So, the answer would be equal to

= 3% + (1.2 × 13%)

= 3% + 15.6%

= 18.60%