By walking through the set of financial data for XYZ, this assignment would help you better understand how theoretical stock prices are computed and how prices might react to market forces like risk and interest rates. You would use both the CAPM (capital asset pricing model) and the constant growth model (CGM) to arrive at XYZ's stock price.
Demonstrate all work, including formulae and calculations used to arrive at financial values.
i) Determine an estimate of the risk-free rate of interest (krf). To get this value, go to Bloomberg.com: Market Data and 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 7.5%.
ii) Download XYZ Stock Information by clicking the link.
iii) Using the information from the XYZ Stock Information document, record the following values:
• iXYZ's beta (ß)
• XYZ's current annual dividend
• XYZ's 3-year dividend growth rate (g)
• Industry P/E
• XYZ's EPS
iv) With the information you recorded, use the CAPM to find out XYZ's required rate of return (ks).
v) Use the CGM to find the current stock price for XYZ. We will call this the theoretical price (Po).
vi) Now use the XYZ Stock Information to find XYZ's current stock quote (P). Compare Po and P and answer the following problems:
• Are there any differences?
• What factors may be at work for such a difference in the two prices?
vii) Now suppose 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 the krf and the stock's beta remains the same for this exercise.
• What would the new price be? Describe.
viii) Refind out XYZ's stock price using the P/E ratio model and the needed info found in the XYZ Stock Information file.
• Why is the present stock price different from price arrived at using CGM (Constant Growth Model)?
ix)) If you used Microsoft Word to arrive at your answers, then you should provide an explanation of the formulas and calculations.
Assignment must include the following:
x) A double-spaced Word document of 2–3 pages which contains the following:
• All of the numerical values listed in the assignment guidelines.
• Your answers to the four problems in the assignment guidelines.
• The formulas and calculations that you used to arrive at your answers
xi) You should include your description of how you used Microsoft Excel for your calculations if applicable.