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Running Head: VALUATION CONCLUSION

Section 4 – Valuation Conclusion

Lashifta Rogers

The University of Arizona Global Campus

BUS 401 – Principles of Finance

Richard Burke

April 26, 2021

Target Corporation Valuation Conclusion

Part 1

An investor may face and must evaluate different types of risks. These risks along with beta risk includes Idiosyncratic risk, industry-specific risk, and market risk. Idiosyncratic risk alludes to the inherent factors that can contrarily affect an individuals’ securities or a certain group of assets in a negative way, and it is considered a diversifiable risk. The systematic risk is viewed as the opposite of idiosyncratic risk, and it is considered risk inherent to the market or segments of the market. It not only affect a specific stock or industry, but it affect the market in general. This type of risk is viewed as unpredictable and cannot be completely avoided (Hickman, Byrd, McPherson, 2013). Industry-specific risk to an investor is considered hazardous and applies only to a specific company or industry. Also, it is recognized as unsystematic risk or diversifiable risk and is the opposite of both market risk and systematic risk.

The required rate of return is considered the minimum return expected from an investor. Beta is critical in evaluating on investing in a project. The ability of estimating the required rate of return and determining the beta asset. Investors focus and concern is if the risk can or cannot be diversified. All three risk (idiosyncratic, industry-specific, and unsystematic risk) are considered diversifiable. Non-diversifiable risk include market risk, economic, and systematic risk (Hickman, Byrd, & McPherson, 2013).

Part 2

Yahoo! Finance (2021) indicated that Target Corporation beta was 0.11. In finance, beta is a measure of the way an individual asset moves on an average during an increase or decrease in the stock market. The market is considered the benchmark, an asset that has a beta of less than 1.0 is less erratic than a more erratic stock with a beta of 1.0 or more (Hickman, Byrd, & McPherson, 2013.

Target Corporation (TGT) required rate of return is calculated using the capital asset pricing model (CAPM). The equation include the required rate of return = risk free rate of return (Rt plus stock’s beta (β) (market risk premium). To determine Target Corporation’s required rate of return, used will be the risk free rate of return of 2%, market risk premium of 5%, the beta of 1.01.

Required Rate of Return (r)

Assumptions

Rate of return on LT Treasury Coimposite1 RF 2.14%

Expected rate of return on market portfolio2 E(RM) 11.71%

Systematic risk of common stock βTGT 0.87

Target Corp. common stock3 required rate of return rTGT 10.44%

RTGT = RF +βTGT [E(RM) – RF]

= 2.14% + 0.87 [11.71% - 2.14%)

= 10.44%

Target Corporation (TGT) required rate of return is 10.44% which is above the 10% capitalization discount rate used in the constant growth rate. The 10.44% required rate of return is the minimum return that investors will accept to own stock in Target Corporation (TGT).

Part 3

To calculate the stock price for Target Corporation (TGT), the constant growth formula will be used for calculation. The constant growth formula used consist of recent dividend (D), dividend growth rate (g), discount rate (r) for calculating stock price.

Formula:

Price = (D (1 + g)

(r – g)

Target Corp stock is selling for under 203.63 as of the 26th of April 2021; that is -1.16 percent down since the beginning of the trading day. The stock's last reported lowest price was 202.85. Target Corp has less than a 11 % chance of experiencing some  financial distress  in the next two years of operation, but did not have a good performance during the last 30 trading days. Equity ratings for Target Corp are calculated daily based on our  scoring framework . The performance scores are derived for the period starting the  26th of January 2021  and ending today, the 26th of April 2021.

References

Hickman K. A., Byrd, J. W., & McPherson, M. (2013). Essentials to finance. Bridgepoint

Education.

Yahoo!Finance. (2021). Target Corporation (TGT). Retrieved from

https://finance.yahoo.com/quote/tgt/key-statistics/

In finance, the beta is a measure of how an individual asset moves (on average) when the overall stock market increases or decrease

Part 1: (two paragraphs)

· Explain the three types of risk and beta, and how these concepts relate to a company’s required rate of return.

Part 2: (two paragraphs)

· Find your company’s beta from a credible source.

· You can get this information from the Mergent database or by looking it up on a financial website like  Yahoo! Finance (Links to an external site.) .

· Compare your company’s beta to the market beta of 1.0. 

· Calculate the company-specific required rate of return using the CAPM formula.

· Show all calculations. 

· Use the beta you determined for your chosen company

· Use a risk-free rate of 2.0%.

· For the market risk premium, use the following assumptions:

· For a large capitalization company (greater than $10.0 billion in market capitalization) use 6.0% as the market risk premium.

· For a mid-cap company (between $2.0 billion and $10.0 billion in market capitalization) use 8.0% as the market risk premium.

· For a small-cap company (less than $2.0 billion in market capitalization) use 11.0% as the market risk premium.

· Compare the company-specific required rate of return you calculated to the required return based on size you used in Section 3: Dividend Analysis and Preliminary Valuation in Week 3 for the constant growth formula.

· Determine whether the company-specific required rate of return higher or lower than the rate of return based on size that you used in Section 3 in Week 3 for the constant growth formula?

· Explain the difference in required rate of returns.

Part 3: (two to four paragraphs)

· Recalculate both estimates (the low-end and the high-end) of the stock price using the constant growth formula.

· Use the company’s specific required rate of return you determined using the CAPM.

· Review your selected high-end and low-end growth rates from Week 3. 

· If either growth rate is higher than the new CAPM discount rate, you must reduce your selected growth rate(s).

· Your growth rates cannot be higher than the discount rate, because the calculations will result in a negative stock price, which is not meaningful.

· Include a short, written explanation to explain the revised growth rates.

· Show your revised high-end and low-end stock price calculations

· Compare each of the two recalculated stock prices to the current stock price per share of the company.

· State whether each recalculated stock price (low-end and high-end) is above or below the current market price.

· State whether each recalculated stock price (low-end and high-end) indicates if the stock price is currently under-valued or over-valued in the market.

· (See Section 9.3: Required Returns in your course text.)

· State your recommendation for your concluded stock price for the company.

· Use either the high-end stock price or the low-end stock price from the constant growth formula using the CAPM required rate of return.

· Justify the conclusion of value for your stock based on the most important financial facts from the prior weeks’ analysis.