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 = 4%, rM = 8%, and bUTI = 1.4. Under current conditions, what is rUTI, the required rate of return on UTI Stock? Round your answer to two decimal places.

The required rate of return on UTI is 9.60%.

Explanation:

To calculate the required rate of return on the UTI stock, we will use the Capital Asset Pricing model or the Security market line equation.

Required rate of return (r) = rRF + Beta of stock * (rM - rRF)

Using this equation, we calculate the required rate of return for UTI to be,

Thus based on the riskiness measured by 1.4 beta and a market risk premium of 4% (8-4) along with the risk free rate of 4%, the required rate of return will be 9.60%

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