| Course | IBF-5040 Corporate and Managerial Finance |
|---|---|
| Module | Module 4 |
| Paper type | Module 4 written assignment: stock valuation and risk |
| Length | About 586 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | MBA in Finance |
| Updated | October 2026 |
Free sample paper for IBF 5040 Module 4
What the Market Expects: Valuing Passaic Precision's Shares With the CAPM and Dividend Models
Student Name
MBA in Finance, Thomas Edison State University
IBF-5040: Corporate and Managerial Finance
Mentor Name
Month Day, Year
What the Market Expects: Valuing Passaic Precision's Shares With the CAPM and Dividend Models
Introduction
Passaic Precision has 20 million shares outstanding, earned $1.82 per share in 2024 and paid a dividend of $0.72. Its shares trade at about $14. Valuing them shows what return investors require and what the market price implies about future growth, both of which matter for the buyback decision from Module 1. The valuation below uses inputs from public market data and the company's own figures from Module 2. Each step is shown so the board can see which assumptions matter most and how far the conclusion depends on them. Moyer et al. (2018) present the dividend discount model as the basic framework for valuing common stock.
The Required Return
Under the CAPM, Passaic's required return is the Treasury rate plus its beta times the market premium. Using 4.3 percent for the ten-year Treasury, 5.5 percent for the premium and a beta of 1.25 gives 4.3 plus 6.9, about 11.2 percent. Beta above 1 reflects the company's sensitivity to the industrial cycle and its debt. The idea comes from Sharpe (1964): with diversified investors, only risk that cannot be diversified away earns a reward, and beta measures it.
Constant-Growth Valuation
Assume dividends rise 4 percent a year forever, about the economy's long-run nominal pace; next year's dividend over the required return less growth then gives $0.72 times 1.04, or $0.749, divided by 11.2 percent minus 4 percent, about $10.44. That is well below the $14 market price.
Two-Stage Valuation
Passaic's return on equity of 15 percent and retention of 60 percent imply sustainable growth near 9 percent while it keeps reinvesting at that return. A two-stage model assumes 9 percent dividend growth for five years, then 4 percent. The present value of the five dividends is about $3.39, and the value at year five of the dividends that follow is about $16.06, worth about $9.46 today, for a total of about $12.85.
| Model | Value per share |
|---|---|
| Constant growth, 4% | $10.44 |
| Two-stage, 9% then 4% | $12.85 |
| Market price | about $14.00 |
What the Gap Implies
The market price is above both estimates, so investors appear to expect faster or longer growth than either model assumes, or they require a lower return than 11.2 percent. A small change in either input moves the value a great deal: at a required return of 10.2 percent, the two-stage value rises above $15. This sensitivity is why valuations should be presented as ranges. It also bears on the buyback: if the shares are not clearly undervalued, buying them back at $14 does not create value for remaining shareholders by itself.
Diversifiable and Market Risk
Total risk includes company-specific events, such as losing a large aerospace customer, and market-wide movements. Investors holding diversified portfolios can eliminate most company-specific risk, so they demand compensation only for market risk. For Passaic's managers, company-specific risk still matters, because it affects the firm's ability to borrow and operate, even if diversified shareholders do not require a premium for it. Shleifer and Vishny (1997) note that large undiversified holders, such as the activist, bear company-specific risk directly and may therefore weigh it more heavily than other shareholders do.
Conclusion
Passaic's required return is about 11.2 percent, and dividend models value its shares between about $10 and $13, below the $14 market price. The gap shows that the market expects more growth than the models assume, and that the shares are not obviously cheap, which weakens the case for a buyback justified by undervaluation.
References
Moyer, R. C., McGuigan, J. R., & Rao, R. P. (2018). Contemporary financial management (14th ed.). Cengage.
Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19(3), 425-442. https://doi.org/10.1111/j.1540-6261.1964.tb02865.x
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. Journal of Finance, 52(2), 737-783. https://doi.org/10.1111/j.1540-6261.1997.tb04820.x
What the IBF 5040 Module 4 instructions ask for
The fourth IBF-5040 written assignment covers stock valuation and risk. Prompts call for CAPM required returns, constant-growth and multistage dividend values, an account of beta and of the two kinds of risk, and a comparison of value with price. Show each input's source, such as the Treasury yield used for the risk-free rate, and the steps of each calculation. Because valuations are highly sensitive to inputs, mentors look for discussion of how results change, not only the final number. Use a recent Treasury yield for the risk-free rate and state the date, a market risk premium supported by a source and a beta from a named provider. Explain why your growth assumptions are reasonable for the company. Present your value as a range around a central estimate and compare it with the market price, saying what the difference implies about investor expectations.
Inside the IBF 5040 Module 4 example
The paper begins with the company's earnings, dividend and price. A section computes the required return with the CAPM and explains beta with reference to the model's origin. Two valuation sections apply constant-growth and two-stage models, with the two-stage growth rate derived from return on equity and retention. A table compares both values with the market price, and a section explains what the gap implies and how sensitive value is to inputs. A risk section distinguishes diversifiable from market risk and explains why managers still care about the former. Every input appears in the text before it is used, so the valuation can be reproduced step by step. The paper does not stop at a number; it asks what the market price implies and how the decision would change if the inputs were slightly different. The closing section connects valuation to the buyback question, keeping the assignment tied to the company the course follows.
IBF 5040 Module 4 rubric: what earns full marks
Mentors grade this assignment on correct calculations, sound choice of inputs, interpretation of results against the market price and accurate explanation of risk. Answers that derive growth from fundamentals, such as return on equity and retention, show understanding beyond plugging numbers. Discussing sensitivity and what the market price implies demonstrates judgment. Connecting valuation to a company decision, such as a buyback, shows integration across the course. Precise language about risk also matters: total risk, systematic risk and beta should not be used interchangeably. Papers that show the arithmetic for the terminal value, including the year in which it is computed and the discounting back to today, avoid the most common error mentors mark down. Clear tables comparing model values with the market price help the reader see the conclusion at once.
Common IBF 5040 Module 4 mistakes, and how to avoid them
Students lose points by using a growth rate above the required return in the constant-growth model, by discounting the year-five price for the wrong number of years or by treating a model's value as certain. Growth must stay under the required return or the formula fails. Discount the terminal value back from the year it is computed. Report the value again at a required return one point higher. Explain what the market price implies. Some students also use a historical dividend growth rate without asking whether it can continue, or choose a beta without saying where it came from. Derive growth from return on equity and retention where you can, and test a lower rate. Explain in plain words why your result differs from the market price rather than assuming the market is wrong. A free first sample on your own IBF-5040 Module 4 problems is available on request.
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IBF 5040 Module 4 questions, answered
Where can I find a free IBF 5040 Module 4 sample paper?
Valuing Passaic's shares with the CAPM and two dividend models is shown above.
How does the CAPM set a required return?
Riskless rate plus beta times the market premium.
What is a two-stage dividend discount model?
A valuation that assumes faster dividend growth for a period, then a lower constant rate, adding the present values of both stages.
How is sustainable growth estimated?
As return on equity times the retention ratio, the share of earnings reinvested.
What is the difference between diversifiable and market risk?
Diversifiable risk is specific to a company and can be eliminated in a portfolio; market risk affects all stocks and is what investors are paid to bear.