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.
Prior to beginning work on this assignment,
In your paper, address the following five parts in a Word document:
Part 1: (two paragraphs)
Part 2: (two paragraphs)
Part 3: (two to four paragraphs)
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The Section 4: Valuation Conclusion paper
Note: Since this is Section 4 of the Week 5 final project, there is no need for an introduction paragraph.
Carefully review the Grading Rubric (Links to an external site.) for the criteria that will be used to evaluate your assignment.
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