Section 4: Valuation Conclusion [WLOs: 3, 4] [CLOs: 1, 2, 3, 4] 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” (Hickman et al., 2013,
Section 9.3, para. 1). 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.
Prepare:
Prior to beginning work on this assignment,
• Complete both of the Week 4 learning activities
• Review Chapters 7 and 9 of Essentials of finance.
• Review the Week 5 – Final Project.
• Review the Week 4 Model Assignment (Links to an external site.).
• Watch the following video:
BUS401 – Valuation Conclusion (Links to an external site.)
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 from a credible source.
o 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 to the market beta of 1.0.
• Calculate the company-specific required rate of return using the CAPM formula.
o Show all calculations.
o Use the beta you determined for your chosen company
o Use a risk-free rate of 2.0%.
o For the market risk premium, use the following assumptions:
▪ For a large capitalization company (greater than $10.0 billion in market
