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Stock price for IBM

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I am confused on where to find the correct numbers for the equation Please help.

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

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 β = 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 β 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 β= 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 + β (r m - r f)

r f = 4.07% =risk free rate (see Qn1)
β= 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%

I cannot duplicate this answer!!!

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

© BrainMass Inc. brainmass.com October 24, 2018, 6:33 pm ad1c9bdddf
https://brainmass.com/business/capital-asset-pricing-model/stock-price-for-ibm-43231

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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
See Also This Related BrainMass Solution

By walking you through a set of financial data for IBM, this assignment will help you better understand how theoretical stock prices are calculated

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.

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%.
Download this IBM Stock Information document (.pdf file). Please note that the following information contained in this document must be used to complete the subsequent questions.
IBM's beta (ß)
IBM's current annual dividend
IBM's 3-year dividend growth rate (g)
Industry P/E
IBM's EPS.
With the information you now have, use the CAPM to calculate IBM's required rate of return or ks.
Use the CGM to find the current stock price for IBM. We will call this the theoretical price or Po.
Now use appropriate Web resources to find 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 - with more weight in grading - so you may want to do some study before answering such a question. Explain your thoughts clearly.
Now assume the market risk premium has increased from 7.5% to 10%; and this increase is due only to the increased risk in the market. In other words, assume krf and stock's beta remains the same for this exercise. What will the new price be? Explain what happened.
Recalculate IBM's stock using the P/E ratio model and the needed info found in the IBM pdf file. Explain why the present stock price is different from the price arrived at using CGM (Constant Growth Model).
To receive full credit on this assignment, please show all work, including formulae and calculations used to arrive at financial values

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