Purchase Solution

Stock price for IBM

Not what you're looking for?

Ask Custom Question

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.

Attachments
Purchase this Solution
Solution Summary

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

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 ...

Purchase this Solution
Free BrainMass Quizzes
Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

View More Free Quizzes
Related BrainMass Solutions

  • Call option strategy

    for premium= $5-$3=$2 Answer: maximum potential profit = $2 b) If, at expiration, the price of a share of IBM stock is $103, what would your profit be?

  • IBM Stock

    Use the CGM to find the current stock price for IBM. We will call this the theoretical price or Po. 5. Now use appropriate Web resources to find IBM\'s current stock quote, or P. Compare Po and P. Do you see any differences?

  • IBM Short Selling Stock

    119780 IBM Short Selling Stock Assume that IBM stock is selling for $110 per share and that you short sell 200 shares of the stock. A) What would be your dollar return if the price of IBM stock drops to $95 per share?

  • Options: Which event will increase the value of a call?

    IBM stock was used for the example in a real life setting.

  • risk-free rate of interest

    P/E ratio for industry = 23.2, EPS for IBM $4.87 Market price = EPS * P/E = 23.2*4.87 = $112.98 This price is higher than the current price of IBM. This is due to the fact that the P/E ratio for IBM is less than that of the industry.

  • CAPM and the Constant Growth Model for IBM

    P/E ratio for industry = 23.2, EPS for IBM $4.87 Market price = EPS * P/E = 23.2*4.87 = $112.98 This price is lower than the current price of IBM. This is due to the fact that the EPS of IBM has not been updated.

  • Calculating the Theoretical Stock Price of IBM

    P/E ratio for industry = 20.30, EPS for IBM $4.94 Market price = EPS * P/E = 20.30*4.94 = $100.28 This price is less than the current price of IBM. This is due to the fact that the P/E ratio for IBM is less than that of the industry.

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

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

  • By walking you through a set of financial data for IBM, this

    283537 IBM Stock: Use CAPM for required rate of return; Use CGM for current price 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

  • By walking you through a set of financial data for IBM, this

    P/E ratio for industry = 23.2, EPS for IBM $4.87 Market price = EPS * P/E = 23.2*4.87 = $112.98 This price is higher than the current price of IBM. This is due to the fact that the P/E ratio for IBM is less than that of the industry.

View More Related Solutions