I would like to get some help with this problem . I have 4 more similar to it and I would like to get some guidance as to what I'm supposed to be doing here. Please provide all calculations and formulas used as well as explanations where possible. Information needed to complete this problem is provided in the attachments. However, there is on web site, which is provided, that must be used to complete the problem. This is an on-line course and basically self-taught. I would really appreciate any and all help that is provided. Your team of experts have kept me afloat over the past 7 months with there advise and expertise in several subjects.
What this question requirs you to do is to use the Constant Growth Model to find the stock price. Compare the price to the current market price and see why the two are different
1. Find an estimate of the risk-free rate of interest, krf.
The US 10 year treasury rate is 4.54% from Bloomberg ( found from the website given)
2. 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.
1. IBM's beta (à?) = 1.64
2. IBM's current annual dividend = $0.80 per share
3. IBM's 3-year dividend growth rate (g) = 8.20 %
4. Industry P/E = 23.2
5. IBM's EPS = $4.87
3. With the information you now have, use the CAPM to calculate IBM's required rate of return or ks.
Using CAPM, the required rate of return is given as
Ks = Risk Free Rate + ( Risk Premium ) X beta
Ks = 4.54 % + 7.5% X 1.64
The solution explains the use of dividend discount model to calculate the stock price using the example of IBM