# Estimate of the risk-free rate of interest

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.

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#### 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)

Where:

? 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