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Pricing the common stock in the market

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1. Assess how diversification benefits the investor. Can you imagine circumstances where an investor would not want to diversify? Discuss why or why not.

2. Analyze the formulation of the Capital Asset Pricing Model including the definition of the model with identification of each component. Explain how the CAPM development effectively makes use of the diversification as a foundation for the development of the model. Discuss the uses of the Capital Asset Pricing Model within finance.

3. Develop the Capital Asset Pricing Model using the assumptions that the risk free rate is 4%, the expected return on the market is 10% and the relevant beta is 1.25.

4. Given problem 3, develop the alternative solutions presented within a table for the assumptions that the beta is 1.15, 1.25, and 1.35 as well as the assumption that the risk free rate is 3%, 4% and 5%.

5. Develop a valuation model for a common stock assuming the most recent dividend per share of the company is $2.0, the assumed growth rate is 5%. The risk free rate is 6% with an expected return on the market of 12% and a beta of 1.5. Show each step in generating the resulting valuation.

6. Given your analysis in question 5 above, form a able showing all combinations for the model with the growth rate at 3%, 5% and 7% and the beta at 0.5, 1.5 and 2.5. Explain why the results that you generate are sensible for the pricing the common stock in the market.

Reference no: EM13792175

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