1. Estimate of the risk-free rate pf interest ("U.S. 10-year Treasury" bond rate = 4.78%. Assumed Market Risk Premium = 7.5%.

2. IBM Stock Information
a. IBM's Beta = 1.64
b. IBM's current annual dividend = $0.80
c. IBM's 3-year dividend growth rate (g) = 8.2%
d. Industry P/E = 23.2
e. IBM's EPS = $4.87

3. With the information you have, use the CAPM to calculate IBM's required rate of return or ks.

CAPM: ks = RF +{ (kM – Krf) x Beta} =

ks = 4.78% + {7.5% x 1.64) = 17.08%

ks = 17.08%

4. Use the GCM to find the current stock price for IBM. We will call this the theoretical price or Po.

D1 = D0 x (1 + g) = $0.80 x (1 + 8.2%) = $7.36

CGM: P0 = D1/(ks – g) =

P0 = $7.36/(17.08% – 8.2%) = $82.88

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?

a. P = $76.28
P0 = $82.88

b.......

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Title: Estimate Of The Risk-Free Rate Pf Interest ("U.S. 10-Year Treasury" Bond Rate
Approximate Word Count: 492
Approximate Pages: 2 (250 words per double-spaced page)

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