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# Stock price for IBM

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The formula to get the CAPM is : ks = k r f + (k m - kr f) x &#946;

This was the problem

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%.

Answer: U.S. 10-Year Treasury 4.07% = k r f

2.Download this IBM Stock Information document (.pdf file attached). Please note that the following information contained in this document must be used to complete the subsequent questions.
My answers are, please check pdf file to see if I have them right.

1. IBM's beta &#946; = 1.64 (60 month beta) (IBM .pdf file)
2. IBM's current annual dividend Div0= \$0.80 (IBM .pdf file)
3. IBM's 3-year dividend growth rate (g) g = 8.20% (IBM .pdf file)
4. Industry P/E = 23.2 ? (IBM .pdf file)?
5. IBM's EPS. = \$4.87 ?(IBM .pdf file)?

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

This is that part I am unsure of. If the formula is ks = k r f + (k m - kr f) x &#946; according to Financial Management Principles and Practice 3rd Edition by: Timothy Gallagher and Joseph Andrew, 9, p.243.

Why was this formula changed to the below formula when I submitted this previously. I am unsure how to get km ? Please help.. The first time I submitted this problem the answer I was given did not seem to follow this formula and I could not repeat the answer that I was given which was:

beta &#946;= 1.64 (60 month beta) (data from IBM Stock Information document)
g= 8.20% (3 year dividend growth rate) (data from IBM Stock Information document)
current dividend Div0= \$0.80 (Annual dividend /Share) (data from IBM Stock Information document)

(data from IBM Stock Information document)

Ks = r f + &#946; (r m - r f)

r f = 4.07% =risk free rate (see Qn1)
&#946;= 1.64 =beta
r m -r f = 7.5% =market risk premium (Given in the problem)
Ks = = required return , to be calculated
Substituting the values
Ks = 16.37% =4.07%+1.64*7.5%

See attached pdf file and previous excel answer from brain mass.

#### Solution Preview

The CAPM formula is

Ks = Risk Free Rate + (Risk Premium) X beta

The two formula that you have here, both are the same. The formula you have are -
Ks = K r f + ( km - k r f ) X beta
Ks = r f + (r m ...

#### Solution Summary

The solution explains the calculation of stock price for IBM using dividend discount model

\$2.19