# Calculate the required rate of return using the Capital Asset Pricing Model (CAPM).

Gloria the
InvestorGloria is
a seasoned sales manager with a very large international company.Although she has a great deal of experience
with sales, she has little experience with investing. Gloria has been investing
in her companys 401K plan. However she has decided to invest some extra money
on her own. Gloria has \$75,000 she would like to invest. Since she
has recently signed up for internet access to a broker, she is allowed a small
number of phone calls to a broker at no additional charge to her. She calls
ABC investments and talks with a Mr. Bill. She tells Mr. Bill she would like to
invest in stocks and can he recommend the best way to value a companys stock.
Mr. Bill said she should research four companies and using the constant growth
model, select the company with the best value. CompanyCurrent stock 2017 Dividend Average
dividendBetaPrice growthVerizon?\$2.362.9%?Wells
Fargo?\$1.561.3%?Exxon
Mobil?\$3.082.7%?Macys?\$1.512.4%?Duke
You will be required to research each companys current market price and its
beta.US
Treasury Rate2.388%S&P
following questions.1.Calculate
the required rate of return using the Capital Asset Pricing Model (CAPM). 2.Using
the constant growth formula (as known as the Gordon Growth Model), calculate
the intrinsic value of each stock.3.Compare
the values you calculated in question 2, do the values closely approximate the
stocks current price? If not why not?4.Which
stock, using your calculations would you recommend Gloria invest in, and why?5.Based
on your calculations, is the Gordon Growth Model an appropriate for to be used
for valuing stocks? If not why not?6.Does,
your calculations support the Market Efficiency theory?
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Gloria the Investor
Gloria is a seasoned sales manager with a very large international company. Although she has a great deal of
experience with sales, she has little experience with investing. Gloria has been investing in her companys
401K plan. However she has decided to invest some extra money on her own. Gloria has \$75,000 she would
like to invest.
Since she has recently signed up for internet access to a broker, she is allowed a small number of phone calls to
a broker at no additional charge to her.
She calls ABC investments and talks with a Mr. Bill. She tells Mr. Bill she would like to invest in stocks and
can he recommend the best way to value a companys stock. Mr. Bill said she should research four companies
and using the constant growth model, select the company with the best value.
Company
Current stock
Price
2017 Dividend
Average dividend
growth
Beta
Verizon
?
\$2.36
2.9%
?
Wells Fargo
?
\$1.56
1.3%
?
Exxon Mobil
?
\$3.08
2.7%
?
Macys
?
\$1.51
2.4%
?
Duke Energy
?
\$3.56
2.1%
?
?
\$0
0
?
** You will be required to research each companys current market price and its beta.
US Treasury Rate 2.388%
S&P Average Return 7%
1. Calculate the required rate of return using the Capital Asset Pricing Model (CAPM).
2. Using the constant growth formula (as known as the Gordon Growth Model), calculate the intrinsic
value of each stock.
3. Compare the values you calculated in question 2, do the values closely approximate the stocks
current price? If not why not?
4. Which stock, using your calculations would you recommend Gloria invest in, and why?
5. Based on your calculations, is the Gordon Growth Model an appropriate for to be used for valuing
stocks? If not why not?
6. Does, your calculations support the Market Efficiency theory?

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