In this assignment, you will recalculate the value of the company’s stock based on your company’s specific required rate of return. To do this, you will calculate the required rate of return for your chosen publicly traded company using the capital asset pricing model (CAPM).
Last week, you determined a preliminary estimate of the company’s stock price using the constant growth formula. To simplify the calculation, you were required to use general market required rates of return, based on size. However, this is an assumption that does not account for the specific risk of an investment in a specific company. This week, you will calculate the required rate of return for your chosen publicly traded company using the CAPM. The CAPM is a more precise tool to estimate a firm’s required rate of return. This tool is “tremendously valuable because required returns are used as the discount rates in the valuation formulas when doing time value of money problems and security valuation”. You will then use this CAPM required rate of return to revise your stock price value based on the constant growth formula. This will allow you to determine your final recommendation of buy, hold, or sell.
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 look 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%.
Use 6.0% as the market risk premium.
Compare the company-specific required rate of return you calculated to the required return based on the 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 is higher or lower than the rate of return based on the size you used in Section 3 in Week 3 for the constant growth formula?
Explain the difference in the 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.
Show all 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 undervalued or overvalued 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.
The Section 4: 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 as outlined in the Writing Center’s APA Formatting for Microsoft Word.
Must include a separate title page with the following:
Title of the paper in bold font
Space should be between the title and the rest of the information on the title page.
Name of institution (The University of Arizona Global Campus)
Course name and number
Must utilize academic voice.
Must include a separate references page formatted according to APA style as outlined in the Writing Center.
Must cite where the financial statement information comes from (e.g., Yahoo! Finance or Mergent) For more information on Rate of Return see this: https://www.encyclopedia.com/articles/how-to-calculate-roi/
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