In your paper, address the following five parts in a Word document:
Part 1: (two paragraphs)
- Explain the three types of risk and beta, and how these concepts relate to a company’s required rate of return.
Part 2: (two paragraphs)
- Find your company’s beta from a credible source.
- You can get this information from the Mergent database or by looking it up on a financial website like Yahoo! Finance
- Links to an external site.
- .
- Compare your company’s beta to the market beta of 1.0.
- Calculate the company-specific required rate of return using the CAPM formula.
- Show all calculations.
- Use the beta you determined for your chosen company
- Use a risk-free rate of 2.0%.
- For the market risk premium, use the following assumptions:
- For a large capitalization company (greater than $10.0 billion in market capitalization) use 6.0% as the market risk premium.
- For a mid-cap company (between $2.0 billion and $10.0 billion in market capitalization) use 8.0% as the market risk premium.
- For a small-cap company (less than $2.0 billion in market capitalization) use 11.0% as the market risk premium.
- Compare the company-specific required rate of return you calculated to the required return based on size you used in Section 3: Dividend Analysis and Preliminary Valuation in Week 3 for the constant growth formula.
- Determine whether the company-specific required rate of return higher or lower than the rate of return based on size that you used in Section 3 in Week 3 for the constant growth formula?
- Explain the difference in required rate of returns.
Part 3: (two to four paragraphs)
- Recalculate both estimates (the low-end and the high-end) of the stock price using the constant growth formula.
- Use the company’s specific required rate of return you determined using the CAPM.
- Review your selected high-end and low-end growth rates from Week 3.
- If either growth rate is higher than the new CAPM discount rate, you must reduce your selected growth rate(s).
- Your growth rates cannot be higher than the discount rate, because the calculations will result in a negative stock price, which is not meaningful.
- Include a short, written explanation to explain the revised growth rates.
- Show your revised high-end and low-end stock price calculations
- Compare each of the two recalculated stock prices to the current stock price per share of the company.
- State whether each recalculated stock price (low-end and high-end) is above or below the current market price.
- State whether each recalculated stock price (low-end and high-end) indicates if the stock price is currently under-valued or over-valued in the market.
- (See Section 9.3: Required Returns in your course text.)
- State your recommendation for your concluded stock price for the company.
- Use either the high-end stock price or the low-end stock price from the constant growth formula using the CAPM required rate of return.
- Justify the conclusion of value for your stock based on the most important financial facts from the prior weeks’ analysis.
