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 (which is 4.08%). 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. (I found the answres listed
below)
1. IBM's beta (ß)-1.64
2. IBM's current annual dividend -0.80
3. IBM's 3-year dividend growth rate (g)- 8.2%
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.
4. Use the CGM to find the current stock price for IBM. We will call
this the theoretical price or Po.
5. Now use appropriate Web resources to find 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 - with more weight in
grading - so you may want to do some study before answering such a
question. Explain your thoughts clearly.
6. 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's beta remains the same for this
exercise. What will the new price be? Explain what happened.
7. Recalculate IBM's stock using the P/E ratio model (pp. 350-1) and
the needed info found in the IBM pdf file. Explain why the present
stock price is different from the price arrived at using CGM. |