Write:
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 companys required rate of return.
Part 2: (two paragraphs)
Find your companys 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 companys 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 companys 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.
Valuation Conclusion paper
Must be two to four double-spaced pages in length including any tables or calculations (but not including title and references pages) and formatted according to APA Style (Links to an external site.) as outlined in the Writing Centers APA Formatting for Microsoft Word (Links to an external site.)
Must include a separate title page with the following:
Title of paper in bold font
Space should be between title and the rest of the information on the title page.
Students name
Name of institution
Course name and number
Instructors name
Due date
Must include a separate references page that is formatted according to APA Style as outlined in the Writing Center. See the APA: Formatting Your References List (Links to an external site.)
Must cite where the financial statement information comes from (e.g., Yahoo! Finance or Mergent)
For help citing the information from Mergent, see the BUS401: Principles of Finance Research Guide.
