Growth Formula Using the CAPM Required Rate of Return

Growth Formula Using the CAPM Required Rate of Return

Instructions/Descriptions

Growth Formula Using the CAPM Required Rate of Return

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)

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Find your company’s beta (verizon) 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 (verizon) 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 (verizon)

Use a risk-free rate of 2.0%.[Order Now]

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.

Growth Formula Using the CAPM Required Rate of Return

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