I. Overview (approximately 1-2 pages) -- Give an overview of the f.docx

I. Overview (approximately 1-2 pages) -- Give an overview of
the firm, including a brief history, its strategy, its tactics, its
primary competitors and its goals.
Questions you may consider: What is the ownership structure?
Is it a family organization? Is it a government bureau or
department? Is it a state-owned enterprise (SOE)? Is it a
conglomerate or a division of a larger organization? What are
the major strengths and weaknesses? How are decisions made?
How is strategy formed? What are major issues or problems the
organization is facing?
II. External Analysis (approximately 1-3 pages) -- Analyze the
general and competitive situation facing the organization. Do
an industry (5 forces) analysis of the industry in which your
organization competes. You need to define the industry clearly.
Questions you may consider: Which of the forces is the most
relevant to the firm’s performance? What are the major threats?
Are there any potential opportunities that may be taken
advantage of in the near future? Is the environment good? Is it
bad? Is it stable? What can be done about the environmental
situation the firm is facing?
References: The Management of Strategy, Chapters 1 & 2
III. Internal Analysis & Business Model (approximately 1-3
pages) -- Analyze the internal resources and management
processes of the organization.
Questions you may consider: What is the main source of value-
added and profit for the company (business model)? What is
the value proposition? What are the major strengths and
weaknesses of the organization? What is the core competence
(capabilities that are valuable, rare, difficult to imitate, and
without substitutes) of the company? Does the organization
have a sustainable competitive advantage? Could the company
benefit from outsourcing? What way is the business adding
value that cannot be matched by competitors? Is it sustainable?

Is the core competence under threat from structural or
technological factors?
References: The Management of Strategy, Chapter 3
IV. Business-level strategies (approximately 1-3) pages --
Combining parts II and III from your analysis above, discuss
how the organization competes in its primary industry or
industries.
Questions you may consider: Is the company a differentiator?
Is it competing on cost? Does it cater to a niche market? Is it
competing in a particular market segment or segments? How
does it market the product? Is it “stuck in the middle”? What
is the unique selling point of the product? Does the business
level strategy seem appropriate?
References: The Management of Strategy, Chapter 4
V. Corporate-level strategy (approximately 1-3 pages) --
Continuing with your analysis of current strategies, move from
the industry-level to the corporate-level.
Questions you may consider: Is the organization operating in
more than one industry? Which industry or industries is the firm
competing in? Should it move into other industries? Is the
company overly diversified? Is there synergy among the
Strategic Business Units (SBUs)? How is the organization able
to achieve synergy among the various SBUs? Does the
corporate-level strategy seem appropriate?
References: The Management of Strategy, Chapter 6.
VI. Other Current Strategies (approximately 2-4 pages) --
Discuss any current strategies that are on-going with the
organization that do not fall under one of the categories
discussed above. Of course, this will vary from organization to
organization.
Questions you may consider: Is there anything else that is
central to the strategy, like expansion into China (or

internationalization for a Chinese organization), joint ventures,
particular competitive rivalries, HRM issues, recent
acquisitions, leadership issues, structural changes, etc.? Is it
effective?
References: The Management of Strategy, Chapters, 5, 7, 8, 9,
10, 11, 12 or 13 (where applicable)
VII. Original Strategy Recommendations (approximately 3-5
pages) – This is the most important part! Based on your analysis
you need to demonstrate your ability to develop original
strategy recommendations for improving the performance of the
organization.
Questions you may consider: What are problems with the
current strategy and how can it be improved? Is the nature of
the industry or the organization changing? Is the current core
competence eroding? Are there technological or regulatory
changes that threaten to alter the nature of competition? Is the
product at a mature stage of the product life cycle? Is
innovation being ignored? Is there a potential issue about which
the organization should be particularly concerned? Are there
succession issues in the organization leadership? Should the
organization consider diversification? Should the organization
consider divesting some of its businesses? Should the
organization consider decentralizing or other restructuring? Are
there trends in the industry that are creating new threats or
opportunities?
VIII. Conclusion(approximately 1-2 pages)
Questions you may consider: What changes would you expect if
your ideas are implemented? Would you be comfortable
introducing these ideas to the top managers of this
organization? How do you think they would be received? What
would be the biggest obstacle to implementing your
suggestions?
FORMAT: The paper should be written in 11 or 12 point font,
double spaced with 1 inch margins. It should follow the
American Psychological Association (APA) format. Ideally, you
will refer to the readings assigned in class and apply this

material to your organization’s situations. The paper should be
a MAXIMUM of 20 pages, not including references, tables,
illustrations or appendices.
Note: The recommendations are the most important part. Your
analysis should be directly linked to your recommendations. All
of the information you provide will be kept strictly confidential
and will be seen by no one except me, unless I have your
explicit agreement otherwise. However, if anyone is interested,
I would be glad to assist you in the capacity of a co-author in
attempting to publish your project in Ivey Business school
publishing, Asian Case Research Journal or other possible
outlets.
FIN534 Week 4 Scenario Script: The CAPM and Market
Efficiency and
Valuing Common Stocks
Slide #
Scene/Interaction
Narration
Slide 1
Scene 1
Opening slide
Slide 2
Scene 2
· Don and Linda in Parking Lot Before Work
· Show Strayer banner
· End of scene
FIN534_4_2_Don-1: I see you are here bright and early as
usual.
You and your intern have been doing fabulous work. We are
looking for someone like your intern to come on board, but I

would like to see your intern work on some more projects
before we consider extending an offer.
FIN534_4_2_Linda-1: Of course, I understand Don. So far,
our intern has done excellent work. Strayer University is really
teaching its students well. Our intern has seemingly learned the
concepts taught in class and has been able to apply here on the
job.
Slide 3
Scene 3
· Don and Linda in front of TFC
·
· Go to next slide
FIN534_4_3_Linda-1: Don, you mentioned some more work?
FIN534_4_3_Don-1: Yes, Linda. Since TFC went public, we
have always considered our stockholder risk averse, as they
want to see their investment grow but without a lot of risk.
Based on the ratio analysis you showed me, it seems we have
been doing just that. However, this expansion project is not
revealing the same picture. When Joe talks to our investors, he
wants to be able to explain why this project is good for TFC’s
future even though financially, it may not seem like the best
move. With that, I would like you and your intern to come up
with the expected rate of return that our investors are currently
benefiting from their equity. This will also be our required rate
of return for the project, as we have to give the investors a
return on their investment.
FIN534_4_3_Linda-2: Sounds great Don. Let’s go inside. I am
going to meet the intern in the conference room to discuss our
next project.
Slide 4
Scene 4
· Linda In conference room

· Show CAPM acronym
· Equation on slide TFC’s Required Rate of Return = Risk-free
rate + Risk premium
· Go to next slide
FIN534_4_4_Linda-1: I just met with Don and he has given us
another project. He asked that we calculate TFC’s expected rate
of return, which is also the required rate of return for our
stockholders. In order to do that we are going to use the Capital
Asset Pricing Model, or CAPM. With the help of the Security
Market Line, or SML, we will use inputs to calculate the
required rate of return. In general the required rate of return for
TFC will be a risk-free rate plus some additional market
premiums. When we put it all together, we will come up with
our required rate of return.
FIN534_4_4_Linda-2: Our formula can be thought of as the
required rate of return for TFC is equal to the risk-free rate plus
a risk premium for TFC’s stock.
Slide 5
Scene 5
· In conference room
· List components and equation
· RTFC = rRF + betaTFC x RPM
· Linda discusses the variables
Go to next slide
FIN534_4_5_Linda-1: In order for us to calculate the required
rate of return, let’s go over all the components of the
calculation.
FIN534_4_5_Linda-2: First, let's look at the Risk-free rate.
This is simply the rate on riskless securities and is commonly
measured by the yield on long term U.S. Treasury bonds. It is
based in the understanding that the U.S. government will not
default on their obligations so the bonds are considered risk
free.

FIN534_4_5_Linda-3: Next is the Market Risk Premium, or RP
sub M. The Market Risk Premium can be thought of as the
additional risk that comes with investing in a non-government
security. This is that extra risk premium that is put on any
security that is above the risk-free rate. From an investor’s
standpoint, they want a premium on any investment that is not
risk-free because they will be assuming the risk and the trade
off is the higher the risk, the higher the return demanded. The
RP sub M is the difference between what the market is returning
and the risk free rate.
FIN534_4_5_Linda-4: And lastly is Beta, which is a measure
of how much TFC’s risk would contribute to a well diversified
portfolio. Typically stocks have a beta between zero point four
and zero point six.
Slide 6
Scene 6
· Still in conference room with paper on table
· Linda makes a phone call (get sound effect of phone dialing)
· Go to next slide
FIN534_4_6_Linda-1: Now that we have our variables, let us
determine what the expected value is. Before we do that, we
need to call the Accounting Department to get some numbers
from them, such as the beta for TFC and the risk free and
market rates.
(Linda makes a phone call)
FIN534_4_6_Linda-2: This is Linda who is working on the
expansion project and we would like to know the long-term U.S.
Treasury bond rate, market portfolio rate, and TFC’s beta.
(Pause)

Thank you.
(Linda hangs up)
FIN534_4_6_Linda-3: (makes a quick laugh) It is something
how once you mention the expansion project everyone stops
what they are doing and gives you what you need.
FIN534_4_6_Linda-4:Accounting said that the long term bond
rate is three percent, the market rate is eighteen percent and
TFC’s calculated beta is point eight.
FIN534_4_6_Linda-5: I am going to the Accounting
Department to personally thank them. While I am gone, can you
calculate the required rate of return based on this data?
Slide 7
Scene 7
Check Your Understanding:
· Calculate Rates here
· Can we have student slide scenario to dollar amount?
· Go to next slide
(1) Linda would like you to calculate the required rate of return
for TFC’s stock given that the long term bond rate is three
percent, the market rate is eighteen percent and TFC’s
calculated beta is point 8.
Student calculates rate here and other scenarios.
(2) What would happen if the beta would change to .6 (point 6)
and all other values are the same?

(3) What would happen if the U.S. long term bond rate was 2%
and all other values are the same?
(1) Correct Answer = 15%.
· If get wrong: Nice try To calculate the CAPM you need to
use the formula RTFC = rRF + betaTFC x RPM
When the risk free rate is .03, market rate is .18 and beta is .8
(2)Correct Answer = 12%
· If get wrong: Nice try To calculate the CAPM you need to
use the formula RTFC = rRF + betaTFC x RPM
(3)Correct Answer = 14.80%
· If get wrong: Nice try, but remember to calculate the CAPM
you need to use the formula RTFC = rRF + betaTFC x RPM

Scene 8
· Move into Linda’s office
· Next slide
FIN534_4_8_Linda-1: Great work! Your calculations show
that TFC’s required rate of return is fifteen percent, which is
also the expected rate of return that investors want. Our
investors have been really good to us so it is nice that we are
giving them a strong return. The issue is…, can we give them
that desired return? As we saw with our financial analysis, this
project will really affect our cash basis, so a lot of analysis is
needed before rendering a decision.
FIN534_4_8_Linda-2: Also, keep in mind that the CAPM is
not perfect. For example, Beta is an estimated number and
there can be changes in rates. However, this measurement gives
us a benchmark based on the available information.
(Phone rings – Don on the line)
FIN534_4_8_Linda-3: Hello Don. We calculated fifteen
percent for the required rate of return.
(Pause)
Yes, it was the intern who did the terrific analysis.

(Pause)
Another request? Sure what would you like us to do?
(A few seconds go by…….)
Okay we will get right on it
FIN534_4_8_Linda-4: Don would like us to go further with
this work and calculate TFC’s stock price. This is the internal
price which may be different from what the market price of
TFC’s stock price.
Don is on his way to the conference room to further explain
what he needs. Comment by Justin Link: Missing.
Slide 9
Scene 9 –
· Don and Linda in room
FIN534_4_9_Don-1: Hello again. The required rate of return
you calculated is very important to us as it tells what our
shareholders can expect to receive as a return on their
investment. Using this rate, we can also determine what we feel
is TFC’s value per share of stock. If we are going to stay
competitive in the fitness center industry, we have to make sure
our price is valued as it should. There are many ways to value
stock. We have decided to use the Constant Growth Model.
Note that we have not valued our stock yet because we did not
have a required rate of return. Thanks to your hard work we
now have that rate and will be using it in the Constant Growth
Model.
FIN534_4_9_Linda-1:Don, you are so right about not valuing
our stock. We always have done our business work on a small
scale, but since we may be undertaking this big expansion
project, we have also decided to revise our business practices.

So not only are we reviewing the financial side of the expansion
project, we are also reviewing what we are doing as a business
in regard to administration. This expansion project will only
make TFC stronger.
FIN534_4_9_Don-2:You are correct Linda. We want to become
stronger all around. But first, we need to look at the value of
TFC. Let us look at some of the variables for determining the
share price.
Slide 10
Scene 10
· Don and Linda in conference room, different part of room
· Put factors on screen – roll them out
· Stock Price (Psub0) = Dsub 0 times (1 plus dividend rate) all
divided by (rate of return minus the dividend rate)
·
· Next screen
FIN534_4_10_Don-1:As I mentioned before, the Constant
Growth Model is the preferred choice for valuing our stock.
There are many ways to value a stock but we have chosen this
model because of a number of factors. The key to this valuation
process is to understand that the value of TFC will be found by
taking the present value of all future cash flows.
FIN534_4_10_Don-2:Our first factor for choosing this method
centers on dividends. Over the years we have been kind to our
investors by providing a flat ten dollar dividend amount. In the
financial world this variable is usually labeled D sub zero.
FIN534_4_10_Don-3:Our second factor is our growth rate,
signified by “g”. This is the rate that we expect dividends to
grow. It has been decided that since we are undertaking this big
expansion project and considering how loyal our investors have
been to us, it is time to increase the dividend rate. We plan to
have dividends grow at the rate of ten percent each year.
Again, we feel that keeping a strong shareholder base is

important. The increase in dividends will enable investors to
receive a constant return on their investment.
FIN534_4_10_Don-4:Our third factor has already been
completed by you and it is the required rate of return, which
you calculated to be fifteen percent.
FIN534_4_10_Don-5:Using the Constant Growth Model, the
formula of stock value for TFC equals dividend today times one
plus the growth rate all divided by the required rate of return
minus the growth rate.
FIN534_4_10_Linda-1: Thanks, Don. I think this is a good
formula for our intern to use.
Slide 11
Scene 11
· CYU
Next Slide
Using all the information that you calculated and what Don
said, what is the value of TFCs stock as of today?
Correct answer is $220. Great job. Using the Constant Growth
Model you would use the dividend in year one divided by the
required rate of return minus the growth rate
· Incorrect – Nice try. Using the Constant Growth Model you
would take Dividends in year one, which is $11 ($10*(1 + .10)
and divide that by (.15-.10) or .05
Slide 12
Scene 12
· Show stock market on TV or reports on market in conference
room

FIN534_4_12_Linda-1:Great job as always. Two hundred and
twenty dollars is what the value of TFC’s stock should be at
today. Don, do you have the most recent trading information on
TFCs stock price as of today?
FIN534_4_12_Don-1: Yes. You know I always have my
electronic devices tuned into the stock market. As of now, TFC
is trading at two hundred twenty dollars and sixty five cents. I
guess you can say we are efficient!
(they all laugh)
Slide 13
Scene 13
· Check Your Understanding – Have student calculate the Price
of a share of stock for TFC
From the information given below, what would the stock price
be for TFC based on the following information? (Justin can you
give choices here for them?
1) Dividend today = $10; Growth Rate = 12%; Required Rate of
Return = 15%
Answer = $373.33
Return = 15%
Answer = $66.67
Return = 15%
Answer = $154.29
Incorrect Feedback: Remember the Constant Growth Model

formula is equal to Today’s Dividend times (1 + Growth Rate)
all divided by (Required Rate of Return – Growth Rate)
Slide 14
Scene 14
· Linda Speaks about how growth rate affects stock price
· Linda moves to another spot
· Next Slide
FIN534_4_14_Linda-1: Great work again. As you can see, with
all else constant the growth rate can really affect the price of a
share of stock. That is why it was important for TFC to
establish a dividend growth rate. Also, when the stock price
calculated is compared to the market price, decisions can be
made as to whether or not they are undervalued or overvalued.
FIN534_4_14_Linda-2: Besides the Constant Growth Model,
there are other valuation models, but in many of the instances
they all are about cash flows. Here we are concerned about
cash as that can be the driving force for many business
decisions.
Slide 15
Scene 15
· Summary Slide – CAPM and Valuing Stocks
FIN534_4_15_Linda-1: This project took us to a different area
of our company. We calculated a required rate which can also
be thought of as the expected return for our investors. We
reviewed how a situational analysis can provide different results
and can be used during the decision making process. After the
required rate of return calculation, we then calculated TFC’s
share price under the Constant Growth Model. We again did
some situational analyses to see how input changes can really

affect business decisions. That is why it is so important to do a
thorough analysis before accepting or rejecting a project. And
that is exactly what we are doing with the TFC expansion
project.
I wonder what our next project will be.
FIN534_4_15_Linda-2: Time for exercise! Let’s go to the
gym.
Slide 16
Scene 16
· Closing slide
· Reminder about weekly discussions.
Closing slide

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I. Overview (approximately 1-2 pages) -- Give an overview of the f.docx