- Find an estimate of the risk-free rate of interest (krf). To obtain this value, go toBloomberg.com: Market Dataand use the “U.S. 10-year Treasury” bond rate (middle column) as the risk-free rate. In addition, you also need a value for the market risk premium. Use an assumed market risk premium of 9.00%.
- Using the information from the XYZ Stock Information document, record the following values:
- XYZ’s beta (Ă)
- XYZ’s current annual dividend
- XYZ’s 3-year dividend growth rate (g)
- IndustryP/E
- XYZ’sEPS
- With the information you recorded, use the CAPM to calculate XYZ’s required rate of return (ks).
- Use the CGM to find the current stock price for XYZ. We will call this the theoretical price (Po).
- Now use theXYZ Stock Informationto find XYZ’s current stock quote (P). Compare Po and P and answer the following questions:
- Are there any differences?
- What factors may be at work for such a difference in the two prices?
- Now assume the market risk premium has increased from 9.00% to 12% and this increase is due only to the increased risk in the market. In other words, assume thekrfand the stock’sbetaremain the same for this exercise.
- What will the new price be? Explain.
- Recalculate XYZ’s stock price using theP/E ratio modeland the needed info found in the XYZ Stock Information file.
- Why is the present stock price different from the price arrived at using CGM (Constant Growth Model)?
- If you used Microsoft Word to arrive at your answers, then you must provide an explanation of the formulas and calculations.
- Adouble-spaced Word document of 2â3 pages that contains the following:
- All of the numerical values listed in the assignment guidelines.
- Your answers to thefour questions in the assignment guidelines.
- The formulas and calculationsthat you used to arrive at your answers
- You must include your explanation of how you used Microsoft Excel for your calculations if applicable.
ScholarMatic: Explanation & Answer
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