Purchase Solution

Calculating Stock Prices Using Real-Time Data

Not what you're looking for?

Ask Custom Question

CALCULATING STOCK PRICES USING REAL-TIME DATA
We will use both the CAPM and the Constant Growth Model (CGM) to arrive at IBM's stock price. To get started, let us do the followings.

1. Find an estimate of the risk-free rate of interest, krf. To get this, go to www.bloomberg.com , click on skip intro and click on Market Data to find the 10-year Treasury bond rate. Use this interest rate as the risk-free rate. You also need a value for the market risk premium. We will use an assumed market risk premium of 7.0%.

2. Using recent information found on the Quicken.com website and copied to this document, find an estimate of IBM's beta (à?). Use Quicken's stock symbol lookup function to get IBM's stock symbol. To get the à?, go to "Fundamentals". While there, also obtain IBM's current annual dividend and its 3-year growth rate or g.

3. Given above, use the CAPM to calculate IBM's required rate of return or ks.

4. Use the CGM to find the current stock price for IBM. We will call this the theoretical price or Po.

5. Go back to Quicken, and obtain IBM's 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- so you may want to think about the answer before answering the question. Explain your thoughts clearly.

6. Now assume the market risk premium has increased from 7.0% to 10%; and this increase is only due to the increased risk in the market. In other words, assume krf and stock's beta remain the same exercise. What will the new price be? Can you explain what happened?

7. Recalculate IBM's stock using the P/E ratio model and the needed info found at Quicken.com. Explain why the present stock price is different from the price arrived at using CGM.
P/E= Price per share/ Earnings per share
Appropriate Stock Price= Industry P/E Ratio*EPS

Here is something far more important to consider. The value for k risk-free is based upon the interest rate for a Ten-Year U.S. Treasury Bond. Given the U.S. Government's annual operating deficits, the challenges and costs of the war on terrorism, its debt and debt service load and the impending wave of Social Security liabilities as "boomers" retire, is it possible that the standard formula for k risk-free may one day prove to be untenable?

Purchase this Solution
Solution Summary

By walking you through a set of real-time 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. This solution is provided in an attached Word document.

Purchase this Solution
Free BrainMass Quizzes
Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

Learning Lean

This quiz will help you understand the basic concepts of Lean.

Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

View More Free Quizzes
Related BrainMass Solutions

  • Standard Deviation in Business Situations

    This makes the standard deviation have units which are the same as the units for data points in the set (such as $ for stock prices) Finance When we are considering investing money in a stock, we are interested in whether the stock prices will change

  • CALCULATI NG STOCK PRICES USING REAL-TIME DATA

    22534 CALCULATI NG STOCK PRICES USING REAL-TIME DATA By walking you through a set of real-time financial data for IBM, you will better understand how theoretical stock prices are calculated; and how prices may react to market forces such as risk and

  • Returns and Variability

    Calculating Returns and Variability: You've observed the following returns on Mary An Data Corporation's stock over the past five years: 27 percent, 13 percent, 18 percent, -14 percent, and 9 percent. a.

  • Finance: Black-Scholes Model

    The data is collected and presented in Excel file on sheet Data. 2) Calculate the implied volatilities of the ITM call using the data from 10/15/2012.

  • growth of GDP

    120 1-Calculate the real GDP for year 2004 and 2005 using 2004 prices.

  • Calculate real GDP

    Calculate the real GDP for year 2004 and 2005 using 2004 prices. By what percent did real GDP grow?

  • Finance:Expected returns and portfolio calculations.

    Calculating Returns and Variability You've observed the following returns on Mary Ann Data Corporation's stock over the past five years: 216 percent, 21 percent, 4 percent, 16 percent, and 19 percent. a.

  • IBM's stock price

    32264 IBM's stock price By walking you through a set of real-time 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

  • Finding price variability and highest average price

    What we need to do is sum each of the daily stock prices, and then divide it by 31, which is the number of data points collected. It is shown that the highest average price is for stock BTX. Best of luck!!

View More Related Solutions