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Explain the three types of risk and beta, and how these concepts relate to a company?s required rate of return. Part 2:

 

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 (verizon) from a credible source.
  • 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%.
    • 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.

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