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# Find an estimate of the risk-free rate of interest (krf). T

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Use both the CAPM (capital asset pricing model) and the constant growth model (CGM) to arrive at XYZ's stock price.

Find an estimate of the risk-free rate of interest (krf). To obtain this value, go to Bloomberg.com: Market Data and use the "U.S. 10-year Treasury" bond rate (middle column) 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%.
Using the information from the XYZ Stock Information document, record the following values:
XYZ's beta (Ã?)
XYZ's current annual dividend
XYZ's 3-year dividend growth rate (g)
Industry P/E
XYZ's EPS
With the information you recorded, use the CAPM to calculate XYZ's required rate of return (ks).
Use the CGM to find the current stock price for XYZ. We will call this the theoretical price (Po).
Now use appropriate Web resources to find XYZ's current stock quote (P). Compare Po and P and answer the following questions:
Are there any differences?
What factors may be at work for such a difference in the two prices?
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 the krf and the stock's beta remain the same for this exercise.
What will the new price be? Explain.
Recalculate XYZ's stock price using the P/E ratio model and the needed info found in the XYZ Stock Information file.
Why is the present stock price different from the price arrived at using CGM (Constant Growth Model)?
Use Microsoft Word to arrive at your answers and provide an explanation of the formulas and calculations.

#### Solution Preview

Hi,
Please see the attached file thanks.

Rates & Bonds
Government Bonds
COUPON MATURITY PRICE/YIELD PRICE/YIELD CHANGE TIME
US 10-Year 2.625 08/15/2020 100-24½ / 2.54 -0-08 / .029 08:21
Australia 10-Year 4.500 04/15/2020 95.26 / 5.14 0.084 / -.012 01:40
Brazil 10-Year 10.000 01/01/2021 932.56 / 11.66 4.434 / -.158 07:40
Germany 10-Year 2.250 09/04/2020 98.52 / 2.42 -0.301 / .035 08:24
Japan 10-Year 0.800 09/20/2020 99.18 / .89 -0.09 / .010 05:58
UK 10-Year 4.750 03/07/2020 114.15 / 3.01 -0.391 / .044 08:24

Go to the website and collect the information about U.S. 10-Year Treasury. Thus, the risk free rate is 2.625%.

2. Download this XYZ Stock Information document (.pdf file). Please note that the following information contained in this document must be used to complete the subsequent questions.

1. XYZ's beta (ß): 1.64
2. XYZ's current annual dividend: \$0.80 per share (from supplied pdf file)
3. XYZ's 3-year dividend growth rate (g): 8.2% (from supplied pdf ...

#### Solution Summary

The solution provides detailed explanations and calculations for the problem.

\$2.19