BA 51 PROJECT – PART 3

Stock Valuation
Your assignment for this part of the project is to determine the required return for your stock using the
CAPM and determine the theoretical value of your firm’s stock using the dividend valuation model and
contrast it to the actual market value.

STEP 1: Determine the required return for your stock using the CAPM, which means determining
the risk-free rate, the market return, and your firm’s beta.

You need to estimate beta for your stock. To do so, you need monthly stock returns for
your stock and the market. End your data time series as of March 2003. For the market
use the S&P 500 and the NASDAQ composite. They can be found on
http://finance.yahoo.com and other web sites. Use the life of the stock or five years of
data, whichever is shorter in estimating beta.

STEP 2: To actually estimate your required return using the CAPM, use the risk-free rate from
www.stls.frb.org. Choose “Economic Research”, “FRED”, “Interest Rates”, and “1 Year
Treasury Constant Maturity Rate for March 2003 and the historical return for the S&P 500
and NASDAQ composite over the last five years ending in March 2003 as your expected
market return (Rm). However, you must annualize the market return. The beta is your
estimate from Step 1 (do both for S&P and NASDAQ).

STEP 3: Determine the theoretical price of your stock.

Find the most recently paid (annual) dividend for your stock or the next dividend if
available. Dividend growth rates are available in Value Line. Another good source is the
long-term growth rate estimate available from, Forbes.com, nasdaq.com, or
Marketguide.com (under “earnings estimates”)

STEP 4: Compare the theoretical price to the actual market price, which can be found on any
finance web site. Determine the dividend growth rate that would be required to justify the
“actual” market price. Discuss the difference in the price, why do you think yours is
different than the market price?

STEP 5: Find out what your stock’s estimated beta is from an outside source such as Value Line,
Dow Jones News Retrieval, etc. How close is your estimate of beta to that of the outside
source? What might cause any differences? What implications does this have for the
markets and investors?

REMEMBER: Include all sources and copies of all information used in the calculations, including copies
of web pages used.