Q$2(20$ Points$)$: Dividend Discount Model $($DDM$)$ and Capital Asset Pricing Model $($CAPM$)$ Analysis Background:

You are a financial analyst at an investment firm, and you have been tasked with evaluating the stock of Company XYZ$.$ Company XYZ has a history of paying regular dividends, and you are to use the Dividend Discount Model $($DDM$)$ combined with the Capital Asset Pricing Model $($CAPM$)$ to assess the stock's value and determine if it aligns with the firm's investment strategy.

Part A: Calculating Required Rate of Return using CAPM $(2$ Points$)$

$1.$ Assumptions:

$$ Assume the risk$-$free rate $($Rf$)$ is $2\%,$ the expected market return $($Rm$)$ is $8\%,$ and Company

XYZ$\text{'}$s beta $(\backslash$beta $)$ is $1\mathrm{.}2.$

$$ Calculate the required rate of return for Company XYZ using the CAPM.

Part B: Estimating Stock Value using DDM $(4$ Points$)$

$1.$ Company XYZ is expected to pay a dividend $($D$1)$ of $$5$ next year, which is anticipated to grow at a constant rate $($g$)$ indefinitely. You need to make an assumption about the dividend growth rate based on Company XYZ$\text{'}$s industry and past performance.

$2.$ Calculate the stock's value using the DDM$.$

Part C: Analysis and Decision Making $(6$ Points$)$

$1.$ Based on your calculations and assumptions, provide a recommendation on whether the investment firm should consider purchasing Company XYZ$\text{'}$s stock. Consider:

$$ The calculated stock value versus its current market price.

$$ The reliability of the assumptions made, particularly the dividend growth rate and the beta.

$$ The potential risks and rewards associated with investing in Company XYZ$.$

Part D: Choice of g and limitations of CAPM and DDM $(8$ Points$)$

$$ submit a brief video in mp$4$ format $(2-5$ minutes$)$ explaining your choice of the dividend growth rate in Part B and critically evaluating the limitations of the CAPM and DDM when applied to real$-$ world scenarios.

$$ You may submit a written report instead of a Video. However, in that case the maximum mark possible for this part will be $4/8$