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By walking you through a set of financial data for XYZ,  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 XYZ’s stock price. To get started, complete the following steps. Find and estimate of the risk-free rate of interest, Krf.

By walking you through a set of financial data for XYZ,  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 XYZ’s stock price. To get started, complete the following steps.

  1. Find and 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. Make sure that you get the yield and not the issue rate. In addition, you also need a value for the market risk premium. Use an assumed market risk premium of 7.5%
  2. Use the attached stock information for XYZ for the following information.
    1. Beta
    2. Current annual dividend
    3. 3 year dividend growth rate (g)
    4. Industry P/E
    5. EPS
  3. With information you now have, use the CAPM to calculate XYZ’s required rate of return or Ks.
  4. Use the CGM (Constant Growth Model) to fine the current stock price of XYZ. We will call this the theoretical price of Po.
  5. Now check the 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? 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 the stock’s Beta remains the same for this exercise. What will the new price be? Explain what happened.

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