## 16 Dec 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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