Explore BrainMass

Explore BrainMass

    Estimate of the risk-free rate of interest

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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 IBM's stock price. To get started, complete the following steps.

    © BrainMass Inc. brainmass.com June 3, 2020, 11:56 pm ad1c9bdddf


    Solution Preview

    Let us discuss some basics:

    CAPM Model
    According to Investopedia.com, the Capital Asset Pricing Model (CAPM) "describes the relationship between risk and expected return and... is used in the pricing of risky securities." The formula used for CAPM is shown below:
    Ke= Rf+B*(Km-Rf)
    ? Ke = Required return on common stock
    ? Rf = Risk-free rate of return; usually the current rate on Treasury bill ...

    Solution Summary

    Response discusses the estimate of the risk-free rate of interest