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You will use both the CAPM (Capital Asset Pricing Model) and the Constant Growth Model (CGM) to arrive at XYZ's stock price. To get started,...


I am in a finance class and need help working through this six question assignment. I believe this would be considered a advanced question.  The file is attached.

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By walking you through a set of Fnancial data for XYZ, this assignment will help you beTer understand how theore±cal 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 XYZ’s stock price. ²o get started, complete the following steps. 1. ³ind and es±mate of the risk-free rate of interest, Krf. ²o obtain this value, go to Market Data ( hTp:// ) and use the “U. S. 10 year ²reasury” bond rate as the risk-free rate. Make sure that you get the yield and not the issue rate. In addi±on, you also need a value for the market risk premium. Use an assumed market risk premium of 7.5% 2. Use the aTached stock informa±on for XYZ for the following informa±on. a. Beta b. Current annual dividend c. 3 year dividend growth rate (g) d. Industry P/E e. EPS 3. With informa±on you now have, use the CAPM to calculate XYZ’s required rate of return or Ks. 4. Use the CGM (Constant Growth Model) to Fne the current stock price of XYZ. We will call this the theore±cal price of Po. 5. Now check the current stock quote, or P. Compare Po and P. do you see any di´erences? Can you explain what factors may be at work for such a di´erence in the two prices? 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 the stock’s Beta remains the same for this exercise. What will the new price be? Explain what happened.
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Hi, Please find attached the solution. Would request you to... View the full answer

9299858 - Solutions.doc

Find an estimate of the risk-free rate of interest (krf). To obtain this value, go to
Market Data and use the "U.S. 10-year Treasury" bond rate (middle column) as the...

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