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Stock Valuation of Hewlett-Packard stock using of CAPM

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A. Using the SML of the CAPM, calculate the required rate of return that would be approprite to evaluate the stock of Hewlett-Packard. Base the expected market return on the average S&P 500 rate of return over the last four years. Assume a beta of 0.95. (Use finance.yahoo.com for data, and put data on excel spreadsheet)

Using the required rate of return calculated in part (a) and the Discounted Cash Flow Model, calculate the intrinsic value of a share of Hewlett-Packard Stock. What assumptions, if any, was it necessary to make?

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Solution Summary

Calculates the required rate of return for the stock of Hewlett-Packard using the Security Market Line (SML) of Capital Asset Pricing Model (CAPM). It uses the return on S&P as a proxy for market return and the return on U.S. 10-Year Treasury as the risk free rate. It then calculates the intrinsic value of a share of Hewlett-Packard Stock using the Dividend discount model (constant growth of dividends).

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