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

Apple Inc.company's beta from a credible source.

• You can get this information from the Mergent database or by looking it up on a financial website like Yahoo! FinanceLinks 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.
  • Show all calculations.
  • Use the beta you determined for your chosen company
  • 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.

• 
  

  • 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.
• 
  
•  

Answer rating: 100% (QA)

To address your request I will provide an explanation of the three types of risk and beta and how these concepts relate to a companys required rate of return I will then analyze the beta and required ... View the full answer