Types of risk and beta

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 AMGEN Inc’s beta from a credible source.
o You can get this information from the Mergent database or by looking it up on a
financial website like Yahoo! FinanceLinks to an external site..
• Compare AMGEN’s beta to the market beta of 1.0.
• Calculate the company-specific required rate of return using the CAPM formula.
o Show all calculations.
o Use the beta you determined for your chosen company
o Use a risk-free rate of 2.0%.
o 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 AMGEN’s 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.
o 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?
o Explain the difference in required rate of returns