Summary Week 4 Assignment.docx Section 4: Valuation Conclusion The University of Arizona Global Campus BUS 401: Principles of Finance Section 4: Valuation Conclusion Part 1 Three categories involve financial risk, business risk, and investors risk

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Section 4: Valuation Conclusion Madison Strong The University of Arizona Global Campus BUS 401: Principles of Finance Leon Daniel February 15, 2021 2 Section 4: Valuation Conclusion Part 1 Thre... e categories involve financial risk, business risk, and investors risk when it comes to any risk. Companies have to be on the lookout when it comes to their making sure that their business succeeds. Risks involving the return rate can have varying factors such as the company's debt, the variability of the operating income, and the overall profitability. When it comes to the different types of beta: there are going to be high beta, low beta, and negative. No company wants to have a negative beta. Most want to stay on the lower end because if a company is a large well-known company and is under that percentage, they are doing something right. Part 2 According to Yahoo! Finance (n.d.), Costco has a beta of 0.65. According to CNBC.com (n.d.), Costco has a beta of 0.64. For the analysis, this will be measuring the market risks. According to the textbook, “Beta measures a firm’s typical responsiveness to information that impacts the entire market, such as information about economic growth, political news, inflationary expectations, the balance of trade, natural disasters, and so on.” (Hickman, Byrd, & McPherson, 2013) If a company has a beta greater than 1, it will have a higher sensitivity to the market's overall changes. Companies with betas lower than 1.0, like Costco, will have a lower sensitivity to overall market changes. When it comes to the capital asset pricing model (CAPM), analysts use the company’s beta (B), a risk-free rate of return (Rf), then the market risk premium (Rm) to determine a company’s required rate of return, the risk-free rate is assumed to be 2.0%, while the market risk premium is 6.0%. Given Costco’s beta of 0.65, the following is the calculation of the CAPM: 3 R = Rf + B (Rm) R = 0.02 + 0.65 (0.06) R = 0.02 + 0.039 R= 0.059 or 5.9% Costco’s computed return rate of 5.9% is significantly below the 10.0% large-cap rate of return. Part 3 The constant growth formula is used to calculate the stock share for Costco. The constant growth formula is used for the most recent dividend (D), a dividend growth rate (g), and a discount rate (r) to calculate a stock price. The formula is: Price = D (1+ g) ( r−g) Costco's dividend growth is 5.0% (g), the low-end dividend growth rate when it comes to the first calculation. The most recent annual dividend is $0.70 per share (D). When it comes to Costco, they are a large capitalization company; the discount rate is going to be 10% (r). By imputing these numbers into the formula, the stock price of $89.83 per share. The calculations are shown down below: Price = $ 0.70 (1+ 0.05) (0.059−0.05) Price = $ 0.70 (1.05) (0.009) Price = $ 0.8085 (0.009) 4 Price = $89.83 Costco's dividend growth is 7.0% (g), the high-end dividend growth rate for the second calculation. The most recent annual dividend is $0.70 per share (D). When it comes to Costco, they are a large capitalization company; the discount rate is going to be 10% (r). By imputing these numbers into the formula, the stock price of $-68.09 per share. Costco's calculated stock price is negative because the discount rate is lower based on the high-end dividend growth rate. Based on this information, we can conclude that the answer is negative and it's not meaningful. The calculations are shown down below: [Show More]

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