10 Yr Treasury Risk-Free Rate Of Interest, Krf.
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By walking you through a set of financial data for IBM, this assignment will help you better understand how theoretical stock prices are calculated; and how prices may react to market forces such as risk and interest rates. You will use both the CAPM (Capital Asset Pricing Model) and the Constant Growth Model (CGM) to arrive at IBMs stock price. To get started, complete the following steps.
Find an estimate of the risk-free rate of interest, krf. To obtain this value, go to Bloomberg.com: Market Data [
Download this IBM Stock Information document (.pdf file). Please note that the following information contained in this document must be used to complete the subsequent questions.
IBMs beta (Я)
IBMs current annual dividend
IBMs 3-year dividend growth rate (g)
Industry P/E
IBMs EPS.
With the information you now have, use the CAPM to calculate IBMs required rate of return or ks.
Use the CGM to find the current stock price for IBM. We will call this the theoretical price or Po.
Now use appropriate Web resources to find IBMs current stock quote, or P. Compare Po and P. Do you see any differences? Can you explain what factors may be at work for such a difference in the two prices? This section is especially important – with more weight in grading – so you may want to do some study before answering such a question. Explain your thoughts clearly.
Now assume the market risk premium has increased from