By walking you through a set of real-time financial data for IBM, you will better understand how theoretical stock prices are calculated; and how prices may react to market forces such as risk and interest rates. Use both the CAPM and the Constant Growth Model (CGM) to arrive at IBM's stock price. To get started, do the followings.
First, find an estimate of the risk-free rate of interest, krf. To get this, go to www.bloomberg.com , click on skip intro and click on Market Data to find the 10-year Treasury bond rate. Use this interest rate as the risk-free rate. In addition, you also need a value for the market risk premium. We will use an assumed market risk premium of 7.0%.
Using recent information found on the http://finance.yahoo.com website or http://moneycentral.msn.com/home.asp, find an estimate of IBM's beta (à?). Use finance.yahoo stock symbol lookup function to get IBM's stock symbol. To get the à?, go to "Fundamentals". While there, also obtain IBM's current annual dividend and its 3-year growth rate or g.
Given above, use the CAPM to calculate IBM's required rate of return or ks.
Use the CGM to find the current stock price for IBM. We will call this the theoretical price or Po.
Go back to finance.yahoo, and obtain IBM's current stock quote, or P. Compare Po and P. Do you see any differences? Can you explain what factors may be at work for such a difference in the two prices? This section is especially important- so you may want to do some study before answering such a question. Explain your thoughts clearly.
Now assume the market risk premium has increased from 7.0% to 10%; and this increase is only due to the increased risk in the market. In other words, assume krf and stock's beta remain the same for this exercise. What will the new price be? Can you explain what happened?
Recalculate IBM's stock using the P/E ratio model( The P/E Ratio - P/E ratio equals Price per Share over Earning per Share) and the needed info found at finance.yahoo Explain why the present stock price is different from the price arrived at using CGM.