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By walking you through a set of financial data for IBM

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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 [http://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).;To receive full credit on this assignment, please show all work, including formulae and calculations used to arrive at financial values;Attachment Preview;FIN410_u3ips.pdf;INTERNATIONAL BUSINESS MACHINES;Price and Valuation;View chart;Current;Price;IBM;52-week;Range;76.28;EPS;IBM;Industry*;60-month;Beta;50-day Avg;Price;71.85 - 99.10;Price/Earnings;1.64;PEG Ratio;200-day Avg;Price;87.72;Price/Sales;Price/Book;$4.87;15.65;1.58;1.27;4.12;N/A*;23.2;.1;1.42;7.0;Latest;Quarterly;Total Return;IBM;Latest;12-month;Total Return;5.1%;Latest;Fiscal;Total Return;Relative;Strength;20.4%;18.4%;N/A*;Latest Annual;Revenue (mil);$89,131.0;(12/2003);Industry*;N/A*;Latest Annual;EPS;IBM;N/A*;Annual;Dividend/Share;IBM;1-yr Income;Growth;3-yr Income;Growth;111.9%;232.43%;1-yr Revenue;Growth;$0.80;5-yr Income;Growth;-9.2%;-28.54%;3-yr Revenue;Growth;9.8%;15.21%;1-yr EPS;Growth;$4.87;Industry*;-0.3%;3.68%;109.7%;261.90%;Dividend;Yield;-33.14%;3-yr Dividend;Growth Rate;1.05%;NC%;10-yr Revenue;Growth;0.5%;3.34%;5-yr EPS;Growth;-8.0%;N/A*;-19.50%;5-yr Revenue;Growth;3-yr EPS;Growth;10-yr Income;Growth;-4.0%;3.4%;3.63%;10-yr EPS;Growth;-2.1%;N/A*;-27.26%;5-yr Dividend;Growth Rate;8.2%;NC%;10-yr Dividend;Growth Rate;9.4%;Financial Strength;View Chart;Total;Debt/Equity;IBM;Long-term;Debt/Equity;.85;Book Value/;Share;IBM;-7.8%;View chart;Latest Annual;Income (mil);$7,583.0;(12/2003);Industry*;IBM;Total Return;(5-yr trailing);20.4%;Growth Trends;IBM;89.50;Long-term;Debt/Assets;0.61;Current Ratio;0.16;$23,632.0;Current;Inventory;Turnover;Quick Ratio;1.2;$16.44;Current;LT Debt;(mil);Current;Total Debt;1.0;16.9;Management Effectiveness;IBM;Industry*;5-yr Avg;Return;on Assets;10-yr Avg;Return;on Assets;Revenue/;Employee;(000's);7.3%;6.6%;7.5%;6.8%;3.4%;Return on;Equity;3.2;View chart;3-yr Avg;Return;on Assets;Return on;Assets;$16,986.0;Current;Receivable;Turnover;3.5%;5.7%;5.9%;3-yr Avg;Return;5-yr Avg;Return;10-yr Avg;Return;$251;N/A*;Income/;Employee;on Equity;IBM;Industry*;on Equity;on Equity;25.2%;30.7%;27.5%;$21;9.2%;10.0%;17.2%;17.8%;N/A*;Cash Flow;View Chart;Annual Oper.;Cash Flow;(mil);IBM;Industry*;$12,314.0;N/A*;Annual;Price/Cash;Flow;IBM;1-yr Oper.;Cash Flow;(mil);26.8%;30.43%;1-yr Avg;Price/Cash;Flow;12.8;12.8%;3-yr Oper.;Cash Flow;(mil);-4.2%;-10.90%;3-yr Avg;Price/Cash;Flow;14.4%;5-yr Oper.;Cash Flow;(mil);Market Cap;(mil);$158,708.47;10-yr Oper.;Cash Flow;(mil);-2.2%;-7.07%;5-yr Avg;Price/Cash;Flow;N/A*;16.86%;10-yr Avg;Price/Cash;Flow;13.8%;Share Information;IBM;(000's);27.2%;11.0%;View Chart;Shares;Outstanding;(000's);1,699,416;Number of;Institutional;Shareholders;3,422;Shares Held;by Institutions;(000's);% Held by;Institutions;948,066;55.1%;*Industry - Diversified Computer Sys;*N/A - Not Available;*N/C - Not Calculable;*N/E - Negative Earnings;*N/M - Not Meaningful;*N/S - Negative Stockholders Equity;NOTE: While several of the above values are fairly current, others come from previous timeframes but have been;included to demonstrate the type of information that is available on various websites. Although the data contained in this;document MUST be used for the purpose of the associated class exercise, it should NOT be used for actual investment;analysis, as only the most current information should be used for that purpose.

 

Paper#25659 | Written in 18-Jul-2015

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