| Course | FIN 402 Investment Fundamentals and Portfolio Management (FIN/402) |
|---|---|
| Week | 4 |
| Paper type | Security valuation paper |
| Length | about 1,076 words, 4 double-spaced pages plus title page and references |
| Format | APA 7 student paper |
| School | University of Phoenix |
| Program | BS in Finance |
| Updated | October 2026 |
Free sample paper for FIN 402 Week 4
Is Harvest Lane Markets Worth $31 a Share? Estimating a Required Return With the CAPM, Valuing the Stock With a Dividend Model and Peer Multiples and Pricing a Corporate Bond
[Student Name]
University of Phoenix
FIN/402: Investment Fundamentals and Portfolio Management
Week 4 Assignment
[Instructor Name]
[Date]
Harvest Lane Markets, its figures and the bond are composites written for a model paper; the models and research findings come from the sources listed.
Harvest Lane Markets, a composite regional grocery chain with 140 stores, trades at $31 a share. It paid a dividend of $1.80 last year, has raised its dividend about 4 percent a year for a decade and earned $2.10 per share. A five-year regression of its monthly returns on the broad market puts its beta at 1.2, higher than most grocers because of its debt. The company has also issued an eight-year bond with a 5 percent annual coupon, now yielding 5.8 percent. Rosa Delgado, the composite investor from earlier weeks, is considering a small position in each. A price is a fact, but a value is an argument, and each model gives that argument a different structure. This paper builds the arguments.
What Investors Should Demand
Sharpe (1964) built the capital asset pricing model on the idea that investors are paid only for systematic risk, which beta measures. In the model, a stock should earn the Treasury rate plus its beta multiplied by the extra return the whole market offers over Treasuries. With a ten-year Treasury yield of 4.3 percent and an assumed market premium of 5.5 percent, Harvest Lane's beta of 1.2 scales the 5.5-point premium to 6.6 points, and adding the 4.3 percent Treasury yield sets its required return at 10.9 percent. The equity premium is the most debated input; estimates from history and from forward-looking models range from about 4 to 7 percent, a range the sensitivity table returns to.
The Constant Growth Value
Gordon (1959) gave the dividend approach its best-known form: if a payout rises by the same percentage every year, divide the payout expected twelve months from now by the required return less that percentage. Next year's dividend is $1.80 times 1.04, or $1.872. Dividing by 0.109 minus 0.04, or 0.069, gives a value of about $27.13, about 12 percent below the $31 price.
What Growth Does the Price Imply?
Turning the model around shows what the market expects. Setting $31 equal to $1.872 divided by 0.109 minus g gives 0.109 minus g equal to 0.0604, so g equals about 4.9 percent. The market price implies dividends growing nearly 5 percent forever, slightly above the company's 4 percent record. That is not unreasonable if new stores and online orders lift growth, but it leaves little margin for disappointment.
Checking the Growth Assumption
A company can grow its dividend only as fast as it grows its earnings over the long run, and earnings grow from the profits it reinvests. Harvest Lane pays out $1.80 of its $2.10 earnings, about 86 percent, and retains only 14 percent. With a return on equity of about 18 percent, its sustainable growth rate, retention times return on equity, is roughly 2.6 percent. The company's 4 percent dividend record therefore relied partly on raising its payout ratio, which cannot continue indefinitely, and on store openings funded with debt. The 4.9 percent growth the market price implies sits well above what reinvestment alone supports. Unless margins improve or the company borrows more, the growth assumption behind the price looks generous.
Peer Multiples
Relative valuation compares the stock with similar companies. Three regional grocers trade at an average of 14 times earnings. Applying 14 to Harvest Lane's $2.10 of earnings gives $29.40. The multiple approach is quick and grounded in market prices, but it assumes the peers are fairly priced and comparable in growth and risk. Harvest Lane's higher debt argues for a slightly lower multiple, not a higher one.
Sensitivity
Small input changes move the dividend model's value widely. With a market premium of 4.5 percent, the required return falls to 9.7 percent and the value rises to about $32.84. With a premium of 6.5 percent, the required return rises to 12.1 percent and the value falls to about $23.11. With growth of 4.5 percent and the base required return, the value is about $29.39. The range from $23 to $33 shows that the model cannot prove the stock is overpriced, only that the current price requires favorable assumptions.
Beyond One Factor
The capital asset pricing model uses only market risk. Fama and French (1993) showed that returns are also related to company size and to the ratio of book value to market value, and their three-factor model often explains returns better than beta alone. Harvest Lane is a mid-sized company with a moderate book-to-market ratio, so a three-factor estimate might change the required return by a point or so in either direction, another reason to treat any single estimate with caution.
Pricing the Bond
The bond pays $50 a year for eight years and $1,000 at maturity. At the market yield of 5.8 percent, the present value of the coupons is $50 times an annuity factor of about 6.26, or about $313, and the present value of the principal is $1,000 divided by 1.058 to the eighth power, about $637. The price is about $950, a discount to face value, since investors today demand more than the 5 percent coupon pays. If Rosa buys at $950 and holds to maturity without a default, she earns 5.8 percent a year.
The Recommendation
The stock is fairly to slightly fully priced: the dividend model and multiples put its value between $27 and $30 under base assumptions, below the $31 price, while favorable assumptions justify the price. For Rosa, whose portfolio already owns Harvest Lane through her index fund, an additional position adds company risk for no clear reward. The bond offers a 5.8 percent yield, above Treasuries, for moderate credit risk; a small holding in her taxable account could add income, though a diversified bond fund would spread that credit risk more widely.
Limits of the Models
Every model depends on inputs that are estimates: beta changes over time, equity premiums are uncertain and growth forecasts are guesses. The models discipline the analysis by making assumptions explicit, which is their real value.
Conclusion
The capital asset pricing model gives Harvest Lane a required return near 11 percent, the dividend model values the stock near $27 and peer multiples near $29, while the market price of $31 implies growth slightly above the company's record. The bond prices at about $950 to yield 5.8 percent. The models suggest caution on the stock and a measured interest in the bond.
References
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56. https://doi.org/10.1016/0304-405X(93)90023-5
Gordon, M. J. (1959). Dividends, earnings, and stock prices. The Review of Economics and Statistics, 41(2), 99-105. https://doi.org/10.2307/1927792
Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425-442. https://doi.org/10.1111/j.1540-6261.1964.tb02865.x
What the FIN 402 Week 4 instructions ask
For FIN 402 Week 4, the usual requirement is to value securities with standard models and interpret the results. Prompts often include the capital asset pricing model and beta, the dividend discount and constant growth models, relative valuation with price multiples and bond pricing from coupon, maturity and yield. Some versions ask students to choose a public company, gather its data and decide whether its stock looks fairly priced; others supply figures. Students are expected to show inputs and calculations, explain where each input came from and test how sensitive the answer is to the assumptions. The discussion should acknowledge competing models, such as multifactor approaches, and cite sources in APA style.
How this FIN 402 Week 4 example is built
A grocery chain with steady dividends suits the constant growth model, which makes it a clean test of the week's tools. The paper begins with the company and its price. The capital asset pricing model supplies a required return from the risk-free rate, beta and an equity premium. The dividend model then gives a value below the market price, so the paper turns the question around and asks what growth the price implies. Peer multiples give a second estimate. A sensitivity table shows how small input changes move the value. The bond is priced at its market yield. The paper ends with a recommendation and a note on what the models leave out.
FIN 402 Week 4 grading rubric: where the points go
Strong marks in this week usually follow from correct model mechanics, sensible inputs and an interpretation that recognizes uncertainty. Instructors check that the required return comes from the capital asset pricing model with inputs stated and sourced, that the growth model is applied only where growth is below the required return, that next year's dividend rather than this year's goes in the numerator and that the bond is priced at the market yield. A sensitivity analysis or a second valuation method earns credit because single-point valuations mislead. A recommendation tied to the investor's portfolio, with model limits acknowledged and APA references, completes the work.
FIN 402 Week 4 help: mistakes to avoid
The most frequent FIN 402 Week 4 mistake is placing the current dividend, rather than next year's, in the constant growth formula. Grow it one year first. Students also pick a growth rate close to the required return, which produces an enormous value; test long-run growth against the economy's growth. Another error is pricing a bond at its coupon rate instead of the market yield. Use the yield investors demand today. Avoid reporting a single value as the truth. Show a range. Explain the source of beta and the equity premium, since different sources give different numbers. Finally, compare the value with the price and say what an investor should do.
Related FIN 402 sample papers
Other FIN 402 week samples
- FIN 402 Week 1: Investment Markets and Securities
- FIN 402 Week 2: Measuring Risk and Return
- FIN 402 Week 3: Diversification and Asset Allocation
- FIN 402 Week 5: Portfolio Management and Evaluation
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FIN 402 Week 4 questions, answered
What does FIN 402 Week 4 usually cover?
It usually covers valuation and pricing models, including the capital asset pricing model, beta, dividend discount and constant growth models, price multiples and bond pricing, applied to decide whether a security is fairly priced.
Where can I find a free FIN 402 Week 4 sample paper?
A grocery chain's stock and bond are valued here with the CAPM, a dividend model, peer multiples and bond pricing, each step annotated, and no payment is needed to read it. Your own company can get a free first draft.
What is the capital asset pricing model?
A model in which a stock's required return is the safe Treasury rate plus a premium scaled by its beta, so investors are paid only for risk that diversification cannot remove.
What is the constant growth dividend model?
A model that prices a share from the coming year's dividend, divided by the gap between the required return and a steady long-run growth rate. It works for stable companies whose dividends grow steadily.
Why do bond prices fall when market yields rise?
Because a bond's fixed coupons and principal are discounted at the higher yield, so their present value drops until the bond offers buyers the same return as newly issued bonds.
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