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

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.

CompanyCurrent stock 2017 Dividend Average dividendBeta

Price growth

Verizon?\$2.362.9%?

Wells Fargo?\$1.561.3%?

Exxon Mobil?\$3.082.7%?

Macy’s?\$1.512.4%?

Duke Energy?\$3.562.1%?

** You will be required to research each company’s current market price and its beta.

US Treasury Rate2.388%

S&P Average Return7%

Answer the 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?