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... from parts that were bought at their current market price. Because of their pile
of stock many pc makers need to ... get the pc they wished for If the IBMs and HPs ...
... They can force the suppliers to reduce price with the ... Accessed on 29/5/2007 • EU
stock market CNN.Com http ... news/2006/101206-us-military-to-test-ibms.html?page ...
... First program data, statistics, stock market quotes, news, specific ... set the software
standard for IBMs, every software ... will offset the drop in price of older ...
Submitted by ashoffner on September 22, 2007
Category: Business
Words: 624 | Pages: 3
Views: 586
Popularity Rank: 14,415
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Step 1:
I used the "U.S. 10-Year Treasury" bond rate from the financial data that was given for this assignment to get the risk free rate which is 4.50%. The market risk premium is assumed at 7.5%.
Step 2:
By using the financial data given for this assignment I completed the subsequent questions (American InterContinental University Online, 2007);
1) IBM's beta (b) = 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.
Step 3:
With the information I have now from steps 1 and 2 I can calculate the required rate of return for IBM using the Capital Asset Pricing Model (CAPM);
kj = RF + [bj * (km – RF)]
Where:
kj = required return on asset
RF = risk-free rate of return, commonly measured by the return on a U.S. Treasury bill = 4.50% as of September 06, 2007, 8:30pm, CST.
bj = beta coefficient or index of nondiversifiable risk for asset j = 1.64.
km - RF = market return; return on the market portfolio of assets = 7.5%.
Calculation (Gitman, 2006):
Required rate of return = 4.50% + (1.64 * 7.5%) = 4.50% + 12.3 = 19.8%.
Step 4:
Using the Constant-Growth Model (CGM), I have calculated IBM's current stock price;
PO = D1 / ks – g
Where:
D1 = expected dividend per share one period from now = $.87.
ks = required rate of return (CAPM) = 19.8%.
g = growth rate in dividends = 8.2%.
Calculation (Gitman, 2006):
Stock price = $.87 / 19.8% - 8.2% = $.87 / 11.6% = $7.50.
Step 5:
IBM's current stock price as of September 7, 2007 is $115.55, comparing that to $7.50 there is a huge difference. This significant difference could be caused by the assumed market risk premium of 7.5% being to low. The CGM method is at a constant rate...
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