Calculating theoretical stock price of ibm

Assignment Help Finance Basics
Reference no: EM1333251

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.

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. IBM's beta
2. IBM's current annual dividend
3. IBM's 3-year dividend growth rate (g)
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 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 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 (Constant Growth Model).

Reference no: EM1333251

Reviews

Write a Review

 

Finance Basics Questions & Answers

  Theory about cost of debt as well as tax shield in us

Theory about cost of debt as well as tax shield in US and conclusions can you reach analyzing corporate debt capacity

  Calculation of a proposal to buy a new milling machine

Calculation of a proposal to buy a new milling machine using NPV and What is the net cost of the machine for capital budgeting purposes

  Computation of target selling price and target cost

Computation of target selling price and target cost of manufacture and Should they make the Re-Rind and what would you say to them to reconcile the positions.

  Determinig annual installments

What if you make the first payment on loan immediately instead of at the end of first year?

  Computation of contract investment realization

Computation of Contract Investment realization and definition of the term hedging and You hold the option until the expiration date when IBM stock

  Stock valuation beneath equilibrium situation

Stock valuation beneath equilibrium situation and Assuming the stock market is efficient and the stocks are in equilibrium

  Estimate of cost of capital with target capital structure

Estimate of Cost of Capital with target capital structure mix of debt and equity - Evaluate your final estimate for rs?

  Scenario analysis for mutually exclusive projects

Find out the range of annual cash inflows for each of the two projects. Suppose that the firm's cost of capital is 10% and that both projects have 20-year lives. Develop a table similar to this for NPVs for each project. Comprise the range of NPVs ..

  Decision making among buy and lease

Decision making among buy and lease and Your landscaping company can lease a truck for $8000 a year (paid at year end) for 6 years

  Ccomputation of annual interest charges for a given degree

Computation of Annual interest charges for a given degree of combined leverage and a lowered degree of combined leverage.

  Evaluation of current ratio and acid test ratio

Evaluation of Current ratio and Acid test ratio - Find how Spectrum's financial performance compares to their Industry for each calculated ratio. It is sufficient to rate each ratio as "G"= good, "S" = satisfactory, or "P" = poor.

  Describe accounts receivables

Describe Accounts Receivables and also needs to increase its level of inventory to support new sales and that inventory turnover is four times

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd