Remember that the goal of corporate managers is to MAXIMIZE the value of the company IN THE MARKET PLACE. We have discussed the importance of the Capital Asset Pricing Model (CAPM) to market pricing and to company valuation. CAPM measures relative riskiness through comparison of a particular asset (security) to the market as a whole (average). CAPM has three components: the Risk-Free Rate of Return (Rf); the Market Risk Premium (MRP(RM - RF); and Beta() which compares the riskiness of an individual security (asset) to the market as a whole Suppose that the rate of return on U.S. government securities is 3.1%. The Market Risk Premium is 5.4%; and the investment being considered is 40% more risky than an "average" investment. What return must the project offer to get investors to provide funds (or shareholder to buy stock)? What is the required return on average market investments'? If the required return you calculated above (Re) relates to common stock, AND the company expects its next annual dividend (D1) to be $ 2.60; and for the company to grow (dividends and value by 3% annually, how much would you expect the stock to sell for today. This exercise highlights the relationship between CAPM and price using the Dividend Growth Model (DGM) from Chapter 8. RE S