Reference no: EM133724350

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 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

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.
Recall that in the required rate of return (r) in Week 3 was assumed to be:

12.0% for a large capitalization company.
15.0% for a mid-cap company.
18.0% for a small-cap company.
Explain the difference in required rate of returns.
Part 3: (two to four paragraphs)

Recalculate the estimate of the stock price that you completed in Week 3 using the constant growth formula.
Use the company's specific required rate of return you determined using the CAPM in Part 2 of this assignment.
Review your selected growth rate from Week 3.
If the growth rate is higher than the new CAPM discount rate, you must reduce your selected growth rate.
Your growth rate 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 rate.
Show your stock price calculation.

Compare the recalculated stock price to the current stock price per share of the company.
State whether the recalculated stock price is above or below the current market price.

State whether the recalculated stock price 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 stock price from the constant growth formula using the CAPM required rate of return or the current market price.
Justify the conclusion of value for your stock based on the most important financial facts from the prior weeks' analysis.