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Calculate the Required Rate of Return and Stock Price for IBM Stock using CAPM and CGM

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

1. Find an estimate of the risk-free rate of interest, krf. To obtain this value, go to Bloomberg.com and use the U.S 10 year treasury bond rate as the risk free rate.

2. Download this IBM stock info. Please note that the following info contained in this document must be to complete the subsequent questions
IBM beta
IBM current annual dividend
IBM 3 year dividend growth rate
Industry P/E

3. With the info you now have, use the CAPM to calculate IBM's required rate of return.

4. Use the CGM to find the current stock price for IBM

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Solution Preview

Please see the attached files.

1. Find an estimate of the risk-free rate of interest, krf. To obtain this value, go to Bloomberg.com: Market Data [http://www.bloomberg.com/markets/index.html] and use the "U.S. 10-year Treasury" bond rate as the risk-free rate. In addition, you also need a value for the market risk premium. Use an assumed market risk premium of 7.5%.

Rates & Bonds
Government Bonds
US 10-Year 3.500 05/15/2020 105-25½ / 2.82 0-23½ ...

Solution Summary

The solution provides the stock information for IMB and calculaties the required return using CAPM and the stock price using the constant growth model.