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2 pages/≈550 words
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APA
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Accounting, Finance, SPSS
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Coursework
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English (U.S.)
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Topic:

Finding Value of a Stock and the Systematic and Unsystematic Risks

Coursework Instructions:

RISK, RETURN, AND STOCK VALUATION
Assignment Overview
For this assignment, Questions 1 and 3 are computational in nature. Questions 2 and 4 are conceptual questions. So make sure to thoroughly review the required background readings and make sure you understand the material at a conceptual level and also understand the steps involved in the computations.
Case Assignment
Please download the Case 3 Template. You will type your answers into this document. Save the document with your last name and submit to the dropbox:
Note that you will get partial credit if you show your work even if the answers are incorrect.
1) Using a dividend discount model, what is the value of a stock that pays an annual dividend of $5 that is not expected to grow and the discount rate is 10%? What will be the value of the stock if the dividend is expected to grow 5% per year?
2) Explain whether each of the following is systematic or unsystematic risk using references to the required
A: There is a large recession.
B: It is discovered that a company lied about its earnings and it is not nearly as profitable as they claimed.
C: The CEO of a successful company gets arrested for some serious crimes, and the company has trouble finding a good replacement.
3) Use the CAPM to calculate the following:
A: The expected return of a stock with a beta of 2, and risk-free rate of 1%, and a market return of 7%.
B: The beta if the expected return of the stock is 8%, the risk-free rate is 2%, and the market rate of return is 6%.
Do you think the following companies would have a high, low, or average beta? Explain your answer using references from the background readings and your knowledge of CAPM and beta:
A: The ACME Umbrella company’s stock goes up a lot when it rains, but goes down when it is sunny. Nothing else but the weather seems to impact ACME’s stock price.
B: Vultures, Inc., specializes in buying assets of bankrupt companies at a discount. Vultures’ stock price seems to go up whenever other companies are doing poorly and going bankrupt, but goes down when other companies are doing well and they have few bankrupt companies to prey on.
C: Unoriginal, Inc., can never decide what products they want to focus on so they make many different products in several different industries. They also invest much of their profits into 100 or so other companies that are listed on the stock exchange.
Watch Youtube Video: https://www(dot)youtube(dot)com/watch?v=r9kTtPBDzZM&t=11s
Peterson, P., & Fabozzi, F. J. (2010). The basics of finance: An introduction to financial markets, business finance, and portfolio management. Hoboken, NJ: John Wiley & Sons, Incorporated. ISBN: 978-0-470-60971-2. Available in the Trident Online Library.
Chapter 19: Valuing Common Stock
This chapter discusses how to value stocks, which can be much trickier than valuing bonds.
Chapter 17: Asset Pricing Theory
This chapter explains systematic and unsystematic risk as well as the capital asset pricing model (CAPM).
Link below for Chapters 19 & 17:
Bennet, T. [Killik & Co]. (2014, September 4). Tim Bennett explains: Understanding volatility: What is beta? [Video]. YouTube. https://www(dot)youtube(dot)com/watch?v=BMKEHiTa4mk
I Hate Math Group, Inc. (2013, March 3). CAPM: Capital asset pricing model [Video]. YouTube. https://www(dot)youtube(dot)com/watch?v=8w43SUAZsY0
Subjectmoney. (2013, January 3). Dividend discount model: Constant growth dividend discount model: How to value stocks [Video]. YouTube. https://www(dot)youtube(dot)com/watch?v=n76Pz3HOBPo&t=10s

Coursework Sample Content Preview:

Trident University
FIN301: Principles of Finance
Module 3: Case Template
Please remember to save this file with your last name in the file name. For example: FIN301 Module 3 Case Template, Doe.doc
To type in this document, please click on the highlighted words, “Click or tap here to enter text.”
Name: Click or tap here to enter text.
Question 1:
Using a dividend discount model, what is the value of a stock that pays an annual dividend of $5 that is not expected to grow, and the discount rate is 10%?
Vo = D1/ (k-g)
= 5 /(0.1-0)
=US$ 50
ANSWER:
US$ 50
What will be the value of the stock if the dividend is expected to grow 5% per year?
Vo = D1(1+g)/ (k-g)
=5 (1+0.05)/ (0.1-0.05)
=5.25/0.05
=US$ 105
ANSWER:
US$ 105
Question 2:
Explain whether each of the following is systematic or unsystematic risk using references to the required background readings:
* There is a large recession.
ANSWER:
☒Systematic Risk
☐Unsystematic Risk
Explain: Systematic risk describes an uncontrollable risk experienced by the whole market segment. To this end, a large recession can be considered largely a systematic risk as it is likely to affect the performance of all the companies operating in the market. Notably, the recession is a macroeconomic phenomenon and can be classified as a systematic risk.
* It is discovered that a company lied about its earnings and it is not nearly as profitable as they claimed.
ANSWER:
☐Systematic Risk
☒Unsystematic Risk
Explain: The case can be largely considered to be an unsystematic risk in the sense that the risk is specific to the involved company. Also, the controllable nature of the risk means that it should be considered an unsystematic risk (Peterson & Fabozzi, 2010). The company should have been forthright about its financial performance to avoid the risk.
* The CEO of a successful company gets arrested for some serious crimes, and the company has trouble finding a good replacement.
ANSWER:
☐Systematic Risk
☒Unsystematic Risk
Explain: Failure to replace an unethical CEO can be considered an unsystematic risk in the sense that its influence does not extend beyond the successful company. Unsystematic risks are largely controllable (Peterson & Fabozzi, 2010). The scenario is considered an unsystematic risk in the sense that the company should have put in place succession planning to ensure that they had a capable leader to replace the CEO.
Question 3:
Use the CAPM to calculate the following:
* The expect...
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