Description
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%.
- Use 6.0% 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.
- 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 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.
Explanation & Answer
Attached. Please let me know if you have any questions or need revisions.
Outline
VALUATION CONCLUSION
Part One; Three types of Risks and beta
The volatility/ risk of financial assets is measured using the beta
Part Two
CAPM
R = Rf + B (Rm)
Part Three
Price = 𝐷 (1 + 𝑔) / (𝑟 − 𝑔)
Running Head: VALUATION CONCLUSION
VALUATION CONCLUSION
Student’s Name
Institution Affiliation
Date
1
VALUATION CONCLUSION
2
VALUATION CONCLUSION
Part One; Three types of Risks and beta
There are three types of risks that affect the value of the investment as much as a portfolio of
investment is concerned. These risks are made up of financial, business, a non-business risk
(OSAYI, 2019). Business risk is a type of risk that is taken by the business enterprise with the
objective of maximizing profits earned by the shareholders. An example of business risk can be
felt hen Apple Inc. undertakes the high-cost risks in marketing while launching financial assets.
Non-business risks are made up of risk, which cannot be controlled by the company. Non-business
risks usually arise from political and economic imbalances in the market. Finally, financial risk
will involve the aspect of financial loss of the company (Amenc, 2018). Financial risks arise as
due to instability and losses in the asset investments with a reflection on the movement in stock
prices, currencies, and interest rates. Financial risk is further made up of oper...
