1) Find an estimate of the risk free rate of interest,krf.To obtain this value ,go to Bloomberg .Com: Market Data
[https://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 ?
6) 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)