Find an estimate of the risk-free rate of interest (krf). To obtain 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 9%. Download the XYZ Stock Information by clicking the link. Using the information from the XYZ Stock Information document, record the following values:
XYZ’s beta (ß) = 1.64
XYZ’s current annual dividend $0.80
XYZ’s 3-year dividend growth rate (g) 8.2%
Industry P/E 15.65
XYZ’s EPS $4.87
With the information you recorded, use the CAPM to calculate XYZ’s required rate of return (ks).
We will call this the theoretical price (Po). Now use appropriate Web resources to 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% to 12% 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 will the new price be? Explain.
Why is the present stock price different from the price arrived at using CGM (Constant Growth Model)?