NOTE: Please follow the instructions; I must use the specific instructions that I attached as well as "current market data."
MS Word document has actual assignment. MS PowerPoint has specific instructions: note the updated figure I placed on slide #1 for 10 year treasury is current (9 sep 09)
PDF has IBM's stock data you are to use.
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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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.
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%.
The current 10 year Treasury Bond Rate is 3.49%
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 (ß)
2. IBM's current annual dividend
3. IBM's 3-year dividend growth rate (g)
4. Industry P/E
5. IBM's EPS.
3. With the information you now have, use the CAPM to calculate IBM's required rate of return or ks.
Using CAPM, the required return is calculated as
Kj= RF+ [bj x (km-RF)] where
RF = risk free rate = 10 year US Treasury rate = 3.49%
(km-RF) = market risk premium = 7.5%
beta = 1.64 (60 ...
The solution explains the calculation of stock price for IBM