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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.
Find an estimate of the riskfree 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. 10year
Treasury" bond rate as the riskfree rate. In addition, you also need a value for the market risk
premium. Use an assumed market risk premium of 7.5%.
Download this IBM Stock Information document (.pdf file).( please see link below for 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 3year dividend growth rate (g)
4.
Industry P/E
5.
IBM's EPS.
With the information you now have, 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.
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View Full DocumentNow 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.
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.
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 Spring '11
 Emil

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