# Constant Growth Model

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 %. 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-bm's beta ; 2- Ibm's current annual dividend ;3-Ibm's 3 year dividend growth rate; 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 . 4-Use the CGM TO FIND THE CURRENT STOCK PRICE FOR ibm .we will call this theoretical price or PO. 5-Now use appropriate web resources to find IBM'S CURRENT STOCK QUOTE OR P.Do you see any differences ? Can you explain 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 KRF AND STOCK BETA REMAINS THE SAME FOR THIS EXERCISE.What will be the new price ? 7-rECALCULATE ibm's stock using the P/E ratio model .Explain why the present stock price is different from the price arrivedat using CGM(Constant Growth Model)

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#### Solution Summary

The solution explains the calculation of share price using the constant growth model and the data for IBM corporation