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

Part 1: (two paragraphs) Duke Energy

· 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.

· 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.

· 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.

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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